ECON 102 Lecture Notes - Lecture 15: Permanent Income Hypothesis, Fiscal Multiplier, Procyclical And Countercyclical

• School: U of M
• Department: Economics
• Course: ECON 102
• Professor: Adam Stevenson

Document Summary

Disposable income in the presence of government is. Yd = (1-t)y - t - tr. Aep = a + mpc[(1-t)y - t + tr] + ip + g. Rgdp = a + mpc[(1-t)y - t + tr] + ip + g. ^ referred to as the big keynesian equation. Makes it clear that investment, government spending, lump-sum tax, and lump-sum transfers are all autonomous with respect to equilibrium rgdp. 3 things to notice of this equilibrium value for now. T appears negatively (more t lower rgdp) while all other autonomous variables appear positively (more a, ip, g, or tr more rgdp) T and tr share the same multiplier (the tax multiplier). A, ip, and g all share the same multiplier (the spending multiplier) Income taxes work in a different way, they change the multipliers. When t = 0, multiplier is just 1/(1-mpc) As t approaches 1, multiplier gets closer to 1. We can state this equation in terms of changes.