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Lecture 1

ABE 1010 Lecture Notes - Lecture 1: Loanable Funds, Tax Cut

1 pages63 viewsFall 2011

Department
ABE - Biological & Agricultural Systems Engineering
Course Code
ABE 1010
Professor
rgr
Lecture
1

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ECONUA1Lecture11ClassicalModel
ClassicalModel:
● Say’sLaw:“supplycreatesitsowndemand”
● Exogenousvariables:land,entrepreneurship,capital,technology,G,T,tasksforworking
● Endogenous:W/P,Labor(L),Output(Y),R(interestrate),Savings,Investment(Ip)
○ Also:C=YST
ComparativeStatics
● Changeinoneofmoreexogenousvariables→changeinendogenousvariables
● Fiscalpolicy:achangeingovernmentspending(G)ortaxes(T)designedtochange
output(Y)andemployment(L)
○ Demandsideeffects
■ Changeintotalspending
○ Supplysideeffects
■ Changeintotalresourcesavailable
■ Changeintechnology
Experiment#1:increaseinG
● Forsimplicity:assumeinitiallyG=T
○ GT=0
○ Gisnotdemandingloanablefunds
● IfGisgreaterthanT,thereisadeficit
○ Consumptiondecreases,Investmentdecreases
○ AmountofdecreaseinC+amountofdecreaseinIp=increaseinG
● Crowdingout:whenanincreaseinonesector’sspendingcausesadecreaseinanother
sector’sspending
● Completecrowdingout:whenanincreaseinonesector’sspending=decreasein
another’sspending
● Conclusion:inclassicalmodel,fiscalpolicyhasnodemandsideeffect
Experiment#2:Taxcut
● InitiallyIpcurveshiftstotherightbecauseofdecreaseinT,causingincreaseinC
● ThenpeopledecidetosavemoreoftheamounttheyhavegainedfromTcut
○ SoConsumptiondecreasesandSavingsincreases
○ AmountofincreaseinC=AmountofdecreaseinIp
○ Totalspendingisunchanged
● Conclusion:inclassicalmodel,fiscalpolicyhasnodemandsideeffect
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