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UIC - ECON 121 - Class Notes - Week 9

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UIC - ECON 121 - Class Notes - Week 9

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background image Chapter 16: Fiscal Policy The primary tools of fiscal policy ­ Government spending ­ Authority to tax ­ Borrowing practices Expansionary fiscal (monetary) policy: ­ increase in government spending or decrease in taxes ­ increase in disposable income (=income­taxes) in the case of taxes ­ component of aggregate expenditures increases in the case of government spending (G) ­ More money in the loanable funds market => interest rate decrease => investment 
increase => GDP increase => inflation.
It causes inflation because more money => the same amount of goods => firms increase the 
price of products => inflation, the value of money is decreasing. But it can reduce 
unemployment in the short run
Restrictive fiscal (monetary) policy:
­ decrease in government spending or increase in taxes ­ decrease in disposable income (=income­taxes) in the case of taxes ­ component of aggregate expenditures decreases in the case of government spending 
­ Less money => interest rate increase => less spending => the price will be adjusted 
lower => deflation.
­ Happens when central banks observes rapid economic growth and fears inflation. ­ Crowding­out:
When government borrows money from fed but the money supply still remain the same 
=> the banks have to increase interest rate => hurts small business because they can’t afford it 
=> crowding out
Government Spending Multiplier Effect: ­ Similar in concept to the money creation multiplier effect ­ Example: an increase in government spending  ∆G > 0 → ∆ (C + I + G + NX) > 0
 ∆ (C + I + G + NX) > 0 → ∆AD > 0
 ∆AD > 0 → ∆RDGP > 0
 ∆RGDP > 0 → ∆Income 1 > 0
Define Consumption (C) = mpcYd ­ Yd = Disposable income (money that available for use) =(income – taxes) ­ mpc = marginal propensity to consume

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School: University of Illinois at Chicago
Department: Economics
Course: Macroeconomy
Professor: William F. Rauscher
Term: Spring 2018
Tags: Economics
Name: econ 121- fiscal policy
Description: fiscal policy and spending multiplier
Uploaded: 03/20/2018
2 Pages 33 Views 26 Unlocks
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