ECON 101 Lecture Notes - Lecture 10: Keynesian Economics, Corporate Tax, Deficit Spending
26 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 10 • Lecture
• Crowding out: when expansionary fiscal policy (increase G) causes increased deficits and higher demand
for loans, increases r and i, thus decreasing Investment I.
• Avoid crowding out by
o Increasing MS
▪ Increases SUPPLY
o Increasing capital mobility - capital inflow from foreigners - open foreign sector
▪ Increases SUPPLY
o business/corp tax cuts
▪ Increases MEI *(return - remember comparing i (cost) to the return, resulting in I); MEI
captures the return on investments
▪ Larger business investment at all interest rates
o Good government spending (R&D, education, public infrastructure, health care)
▪ Increases MEI
▪ Education & health increase worker productivity - boosts MEI because capital and labor
are complements
▪ R&D leads to innovation - lowers business costs
▪ Public infrastructure - reduces transportation & communication costs - lowers business
costs
o Fed monetizing debt - fed buys gov bonds directly and credits the treasury account
▪ No change to Demand of loans due to deficit - doesn’t lead to increased r
▪ It’s like printing money
▪ On the fed balance sheet
• Liquidity trap - no crowding out
o AD deep in Keynesian range (very depressed unemployment)
o MEI very depressed goes straight to 0
o D and S very depressed (D far left and S far right, doesn’t intersect unless negative r)
o Expansionary Fiscal policy
▪ Increase G, increase TS, increase AD (AD starts very deep in keynesian range and shifts
with very little change in PL)
▪ Demand for loans shifts due to increased deficit and selling of bonds
▪ Investment I is effectively 0, so is r and i, and no change as shift in demand still does not
intersect supply
▪ No change in interest rate
▪ *This describes Keynesian ignorance of the concept of crowding out
▪ Deficit spending in this typically good - can close out the money market (towards
positive real rate r territory)
o Keynesian wrote during depression (deep liquidity trap) - does not care about crowding out
• “Crowding in” (a keynesian concept) - results from good government spending
o **Education, healthcare, R&D, innovation, capital accumulation, public infrastructure
o A la keynes (start the AD far from full employment) - good gov spending
▪ Increased good gov spending G, increases TS, increases AD, increases Y, increases PL
▪ Because more spending, increased deficit and increase D, increase r
▪ Because spending is good & business expectations rise because people know where
money is going, MEI shifts out
▪ i increases on a larger MEI leads to more investment I
▪ More I, increases TS and AD, increasing Y and PL
▪ LONG RUN: more investment I
• Capital accumulation*
• Worker productivity*
• Innovation*
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Part 10 lecture: crowding out: when expansionary fiscal policy (increase g) causes increased deficits and higher demand for loans, increases r and i, thus decreasing investment i, avoid crowding out by. Increasing capital mobility - capital inflow from foreigners - open foreign sector. Increases mei *(return - remember comparing i (cost) to the return, resulting in i); mei captures the return on investments: larger business investment at all interest rates, good government spending (r&d, education, public infrastructure, health care) It"s like printing money: on the fed balance sheet. Increase g, increase ts, increase ad (ad starts very deep in keynesian range and shifts with very little change in pl: demand for loans shifts due to increased deficit and selling of bonds. *this describes keynesian ignorance of the concept of crowding out positive real rate r territory: keynesian wrote during depression (deep liquidity trap) - does not care about crowding out.
