lectures in macroeconomics- charles w. upton fiscal policy-part 1
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Lectures in Macroeconomics- Charles W. Upton
Fiscal Policy-Part 1
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Fiscal Policy-Part 1
The Argument
• The myth:– Increased Government Spending causes
inflation.
• The reality:– It is a complicated story.
Fiscal Policy-Part 1
Our Starting Point
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Fiscal Policy-Part 1
An Example
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Suppose the government
decides to increase spending by $X
Fiscal Policy-Part 1
An Example
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Suppose the government
decides to increase spending by $X
A one period spending increase on a foolish project
Fiscal Policy-Part 1
An Example
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Suppose the government
decides to increase spending by $X
A one period spending increase on a foolish projectFinanced by a
surcharge on last year’s tax bill
Fiscal Policy-Part 1
Why this Choice?
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We know beneficial products (a new highway)
can have a beneficial effect,
raising A or K
Fiscal Policy-Part 1
Why this Choice?
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We know beneficial products (a new highway)
can have a beneficial effect,
raising A or K
We also know that taxes on wages, consumption, etc
can have disincentive
effects.
Fiscal Policy-Part 1
Why this Choice?
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We know beneficial products (a new highway)
can have a beneficial effect,
raising A or K
We also know that taxes on wages, consumption, etc
can have disincentive
effects.
Here we are looking at
spending per se
Fiscal Policy-Part 1
What Happens
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Y is up by $X because of the government’s
spending.
Fiscal Policy-Part 1
What Happens
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Y is up by $X because of the government’s
spending.
Y is down by <$X because of
reduced wealth and consumption
Fiscal Policy-Part 1
What Happens
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Y is up by $X because of the government’s
spending.
Y is down by <$X because of
reduced wealth and consumption
In part the increased demand is met by people working harder
Fiscal Policy-Part 1
What Happens
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Y is up by $X because of the government’s
spending.
Y is down by <$X because of
reduced wealth and consumption
In part the increased demand is met by people working harder
The auctioneer notes that
DY-SY = X-Y>0.
Fiscal Policy-Part 1
The Shift in the Y Curve
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Fiscal Policy-Part 1
The M Curve
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With wealth down,, Money Demand is down. Ergo, the M curve shifts up and
to the left
Fiscal Policy-Part 1
The Shift in the Y Curve
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Fiscal Policy-Part 1
The Shift in the Y Curve
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This is a familiar case, “Spending Foolishly”
Fiscal Policy-Part 1
The Shift in the Y Curve
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Fiscal Policy-Part 1
The Shift in the Y Curve
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We know P is up, r is uncertain
Fiscal Policy-Part 1
The Shift in the Y Curve
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We know P is up, r is uncertain
As drawn, r is up;
economists think this is the likely outcome
Fiscal Policy-Part 1
The Shift in the Y Curve
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We know P is up, r is uncertain
As drawn, r is up;
economists think this is the likely outcome
This is sometimes
referred to as demand pull inflation (or cost push inflation)
Fiscal Policy-Part 1
The Shift in the Y Curve
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We assumed that there was an increase in
Government Spending, financed by taxation.
Could different financing scenarios lead to different results?
Fiscal Policy-Part 1
Changing the Experiment
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We assumed that there was an increase in
Government Spending, financed by taxation.
Could different financing scenarios lead to different results?
Fiscal Policy-Part 1
Changing the Experiment
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We assumed that there was an increase in
Government Spending, financed by taxation.
Could different financing scenarios lead to different results?
Suppose the government
just borrowed $X
Fiscal Policy-Part 1
Changing the Experiment
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We assumed that there was an increase in
Government Spending, financed by taxation.
Could different financing scenarios lead to different results?
Suppose the government
just borrowed $XIf people have
a bequest motive, no
change
Fiscal Policy-Part 1
Borrowing, No Bequest Motive
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Fiscal Policy-Part 1
Borrowing, No Bequest Motive
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Here there is a difference, albeit a small
one
Fiscal Policy-Part 1
End
©2004 Charles W. Upton. All rights reserved