ECO209Y1 Lecture Notes - Lecture 6: Fiscal Policy, Parsec, Equilibrium Level

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14 Nov 2017
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Goods market and assets market must be in equilibrium simultaneously. At equilibrium, will remain at that point indefinitely unless there is a disturbance. If economy is not at full employment, output can be increased without increasing price level. Up to private sector (through mpc and multiplier) to increase expenditure to new equilibrium. Assumes c is constant, individuals will always consume at c c is average for economy as whole. Not everyone has same c c depends on income. Rich people do not need to spend more on consumption mpc very close to zero. If income low, mpc close to 1 mpc is weighted average of all individuals with respect to income. If redistributing income (taxing rich, subsidies to poor), mpc will increase for economy as whole. Model assumes constant fraction c on increased yd will be spent. Government spending shifts ae curve up but increased interest rate leads to crowding out of business investment.

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