Transcript Calculation and use of the lump sum tax multiplier (15 points)

III. UNIT III
.
.
F. Fiscal Policy
1. Calculation and use of the
multiplier
2. Calculation and use of the
lump sum tax multiplier
3. Discretionary fiscal policy . .
applications
4. Problems, criticisms, complications
5. Supply-side fiscal policy
INCOME
GDPequals C
900
0
1650
1000
2400
2000
3150
3000
3900
4000
4650
5000
5400
6000
6150
7000
6900
8000
7650
9000
8400
10000
9150
11000
9900
12000
10650
13000
14000
11400
REAL
PI IS 600
G IS 500
MULT. = 4
SUPPOSE THAT NET
LUMP SUM TAX IS RAISED BY
$666 2/3,
(Meaning NET TAXES
Raised by 666 2/3)
SUPPOSE THAT THE
LUMP SUM
TAX
IS
RAISED
BY
PREDICTION!!!!!!!
A.D. WILL FALL BY
$666 2/3
$2000
DETERMINANTS OF
AUTONOMOUS CONSUMPTION
1. NOMINAL WEALTH AUTO. C
AUTO. C
2. PRICE LEVEL
AUTO. C
3. CONSUMER DEBT
4. EXPECTATIONS
5. LUMP SUM TAXES
6. MONEY SUPPLY
AUTO. C
AUTO. C
AUTO. C
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
?
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
4
X
(
?
)
=
?
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
4
X
(
4
X
(
?
)
=
?
)
?
3/4 X +666 2/3 =
MPC
TAX CHANGE
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
4
X
(
4
X
(
!
?
)
=
?
)
?
- 3/4 X +666 2/3 =
- MPC
NET TAX CHANGE
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
4
X
(
4
X
(
!
-500
?
)
=
)
- 3/4 X +666 2/3 =
- MPC
-2000
?
?
NET TAX CHANGE
PRICE
LEVEL
P.L.2
NOT TO
SCALE!!!!!!!
$900
A.C.
6000 600
I.C.
P.I.
500
G
8000
A.S.2
PRICE
LEVEL
NOT TO
SCALE!!!!!!!
400 6000 600 500
P.L.2
P.I. G.
A.C. I.C.
7500
A.S.2
PRICE
LEVEL
NOT TO
SCALE!!!!!!!
4
5
0 600
500
400 0 600 500
P.L.2
A.C. I.C. P.I. G
G.
6000
A.S.2
INCOME
REALGDPequals C
900
0
1650
1000
2400
2000
3150
3000
3900
4000
4650
5000
5400
6000
6150
7000
6900
8000
7650
9000
8400
10000
9150
11000
9900
12000
10650
13000
14000
11400
PI IS 600
G IS 500
INCOME
REALGDPequals C
900 400
0
1650 1150
1000
2400 1900 PI IS 600
2000
3150 2650
3000
3900 3400 G IS 500
4000
4650 4150
5000
5400 4900
6000
6150 5650
7000
6900 6400
8000
7650 7150
9000
8400 7900
10000
9150 8650
11000
9900 9400
12000
10650 10150
13000
14000
11400 10900
CHANGE
CHANGE IN
MULT X IN AUTONOMOUS
=
AD
PLANNED SPENDING
4
X
(
4
X
(
!
-500
?
)
=
)
- 3/4 X +666 2/3 =
- MPC
-2000
?
?
NET TAX CHANGE
CHANGE
CHANGE IN
NET
MULT X IN AUTONOMOUS
=
- MPC X
AD
TAX CHANGE
PLANNED SPENDING
)
(
4
X
(
4
X
(
!
-500
?
)
=
)
- 3/4 X +666 2/3 =
- MPC
NET TAX CHANGE
-2000
?
?
CHANGE
CHANGE IN
NET
MULT X IN- AUTONOMOUS
MPCXTAX CHANGE =
AD
PLANNED SPENDING
(
(
)
)
CHANGE
CHANGE IN
NET
1
X - MPCXTAX CHANGE =
AD
MPS PLANNED SPENDING
CHANGE
CHANGE IN
NET
MULT X IN- AUTONOMOUS
MPCXTAX CHANGE =
AD
PLANNED SPENDING
(
(
]
[
)
)
CHANGE
CHANGE IN
NET
1
X - MPCXTAX CHANGE =
AD
MPS PLANNED
SPENDING
1
CHANGE
CHANGE IN
NET
MULT X IN- AUTONOMOUS
MPCXTAX CHANGE =
AD
PLANNED SPENDING
)
(
CHANGE
NET
1
- MPC X TAX CHANGE
X
MPS
PLANNED
SPENDING
1
[
( ]
MPC
MPS
)
CHANGE IN
=
AD
NET
CHANGE IN
=
X
AD
TAX CHANGE
CHANGE
NET
MULT X IN AUTONOMOUS
- MPC X TAX CHANGE
PLANNED SPENDING
(
(
]
[
CHANGE
NET
1
- MPC X TAX CHANGE
X
MPS
PLANNED
SPENDING
1
MPC
MPS
)
)
CHANGE IN
=
AD
CHANGE IN
=
AD
NET
CHANGE IN
=
X
AD
TAX CHANGE
LUMP SUM TAX MULTIPLIER
SUPPOSE THAT THE
LUMP SUM TAX IS RAISED BY
$666 2/3
SUPPOSE THAT THE
LUMP SUM
TAX
IS
RAISED
BY
PREDICTION!!!!!!!
A.D. WILL FALL BY
$666 2/3
$2000
MPC
MPS
NET
CHANGE IN
=
X
AD
TAX CHANGE
LUMP SUM TAX MULTIPLIER
-
3
4
1
4
.75
.25
=
- 3
- 3
MPC
MPS
NET
CHANGE IN
=
X
AD
TAX CHANGE
LUMP SUM TAX MULTIPLIER
-3
X
+666 2/3
=
-2000
STANDARD SETUP
LUMP
SUM
X
TAX
MULT.
CHANGE
NET TAX
=
IN
CHANGE
A.D.
NEVER
VIOLATE
THIS
SETUP
FINAL NOTE!
TAXATION AND G CAN MOVE INDEPENDENTLY
OF ONE ANOTHER.
DO NOT ASSUME THAT IF T IS CUT
G WILL BE CUT
DO NOT ASSUME THAT IF T IS RAISED
G WILL BE RAISED