Class Notes (808,092)
Canada (493,002)
MGEA06H3 (157)
Iris Au (146)
Lecture

# Introduction to Macroeconomics: Math App - Lecture 010

4 Pages
119 Views

School
University of Toronto Scarborough
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Winter

Description
6 February 2013 CHAPTER 23: FISCAL POLICY AND AGGREGATED SUPPLY TO DEMAND MODEL [CONT’D] The Size of the Government and the Size of the Multiplier It turns out the size of the government/public sector would affect the fluctuations of Y* when the economy experiences exogenous shocks. CASE 1: A SMALLER GOVERNMENT The Initial Model (Week 4) A Smaller Government (After) C = 20 + (7/8)DI C = 20 + (7/8)DI T = (2/7)Y – 20 T = (3/28)Y TR = 220 – (1/7)Y TR = 80 – (1/28)Y I = 100 I = 100 G = 250 G = 110 X = 120 X = 120 IM = (1/8)Y IM = (1/8)Y A smaller government has lower tax rate, lower (transfer) benefit reduction rate, and smaller government spending. We want to see what happens to the equilibrium output and multiplier. The Initial Model (Week 4) A Smaller Government (After) DI = Y – T + TR DI = Y – T + TR DI = 240 + (4/7)Y DI = Y – 3/28Y + (80 – 1/28Y) DI = 80 + (6/7)Y C = C(Y) C = C(Y) C = 230 + 1/2Y C = 20 + 7/8 (80 + 6/7Y) C = 90 + 3/4Y AE = C + I + G + X – IM AE = C + I + G + X – IM AE = 700 + 3/8Y AE = (90 + 3/4Y) + 100 + 110 + 120 – (1/8)Y AE = 420 + 5/8Y Y* = 1120 Y = 420 + 5/8Y Y* = 1120 Multiplier, M Multiplier, M M = 1 / (1 - Y ) = 1.6 M = 1 / (1 – Y ) = 2.67 When the government goes smaller, the multiplier becomes bigger. CASE 2: A LARGER GOVERNMENT The Initial Model (Week 4) A Larger Government (After) C = 20 + (7/8)DI C = 20 + (7/8)DI T = (2/7)Y – 20 T = (4/7)Y TR = 220 – (1/7)Y TR = 320 – (3/14)Y I = 100 I = 100 G = 250 G = 530 X = 120 X = 120 IM = (1/8)Y IM = (1/8)Y A larger government has higher tax rate, higher (transfer) benefit reduction rate, and larger government spending. The Initial Model (Week 4) A Larger Government (After) DI = Y – T + TR DI = Y – T + TR DI = 240 + (4/7)Y DI = 320 + (3/14)Y C = C(Y) C = C(Y) C = 230 + 1/2Y C = 300 + (3/16)Y AE = C + I + G + X – IM AE = C + I + G + X – IM AE = 700 + 3/8Y AE = 1050 + (1/16)Y Y* = 1120 Y* = 1120 Multiplier, M Multiplier, M M = 1 / (1 - CY) = 1.6 M = 1 / (1 – CY) = 1.067 When the government becomes larger, the multiplier becomes smaller. Bigger government means a smaller multiplier. This implies that if the economy is less prone to external shocks (output fluctuates by smaller amount for a given change in autonomous expenditure). Smaller government means a larger multiplier. This implies that the economy is more prone, vulnerable; to external shocks (output fluctuates by larger amount for a given change in autonomous expenditure). The effectiveness of the automatic stabilizer depends on the size of the government. Develop the AS-AD Model: Bringing Price into the Model We need to include prices in the model which had been absent so far. In fact, so far, all we have had is a demand side model (the Keynesian cross and the AE function focus on the demand side only). How do we get prices into the model? We need to look at both supply
More Less

Related notes for MGEA06H3

Log In

OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.

Request Course
Submit