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Gmultiplier SFLS
- 2. Sooooooo… 1.) Full employment - about 5% unemployment 2.) Stability (Prices) 3.) Economic growth 4.) Balance of Payments Equilibrium - about 2% inflation - about 3% growth (7% in China) AD = C + I + G + (X – M) These are our Macroeconomic goals… This is our Macroeconomic equation… And the G in the equation is the government attempting to smooth out the business cycle with it’s policy… Expansionary Fiscal Policy Contractionary Fiscal Policy
- 3. AD = C + I + G + (X – M) And there are two ways to enact either policy… Government spending Taxes And the two ways this is accomplished… Discretionary Fiscal Policy Automatic Stabilizers
- 4. AD = C + I + G + (X – M) Federal Budget And there are the resources used to do this… Which comes from either… Taxes Borrowing Soooooooooooo……. The next question is how effective are these policies…
- 5. Big G Man This Man represents the Government in our economy so we will call him… Fiscal Policy Effectiveness Example
- 6. I work for the Government! Big G Man Let’s look at our country’s AD! Fiscal Policy Effectiveness Example
- 7. Price level GDP AD SRAS PE YN Y1 P1 LRAS Big G Man Oh No! the AD is below the long run equilibrium! Fiscal Policy Effectiveness Example
- 8. Price level GDP AD SRAS PE YN Y1 P1 LRAS I am sad for my country Big G Man Fiscal Policy Effectiveness Example
- 9. Price level GDP AD SRAS PE YN Y1 P1 LRASLet’s check the GDP spending numbers Big G Man Fiscal Policy Effectiveness Example
- 10. Price level GDP AD SRAS PE YN Y1 P1 LRASLet’s check the GDP spending numbers AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man Fiscal Policy Effectiveness Example
- 11. Price level GDP AD SRAS PE YN Y1 P1 LRAS AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man Our country has a $10 billion shortfall in AD Fiscal Policy Effectiveness Example
- 12. Price level GDP AD SRAS PE YN Y1 P1 LRAS AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man Ok simply, the government can just spend $10 billion to fill this hole! Fiscal Policy Effectiveness Example
- 13. G Price level GDP AD SRAS PE YN Y1 P1 LRASOk simply, the government can just spend $10 billion to fill this hole! $10 billion Spending = AD $10 billion Big G Man Fiscal Policy Effectiveness Example
- 14. G Price level GDP AD SRAS PE YN Y1 P1 LRASOk simply, the government can just spend $10 billion to fill this hole! $10 billion Spending = AD $10 billion Fiscal Policy Effectiveness Example Big G Man
- 15. G Price level GDP AD SRAS PE YN Y1 P1 LRASOk simply, the government can just spend $10 billion to fill this hole! $10 billion Spending = AD $50 billion Y2 P2 Big G Man If MPC is 0.8( ) Fiscal Policy Effectiveness Example
- 16. G Price level GDP AD SRAS PE YN LRASOh no! the economy is overheating and now we have too much inflation! $10 billion Spending = AD $50 billion AD1 Y2 P2 = Inflation Fiscal Policy Effectiveness Example
- 17. G Price level GDP AD SRAS PE YN LRAS What did I do wrong? $10 billion Spending = AD $50 billion AD1 Y2 P2 = Inflation Fiscal Policy Effectiveness Example
- 18. Expansionary Fiscal Policy AD = C + I + G + (X – M) Government spending Price level GDP AD SRAS PE LRAS YN Y1 P1 AD1 Spending in an economy has a multiplier effect
- 19. Expansionary Fiscal Policy AD = C + I + G + (X – M) Taxes Price level GDP AD SRAS PE LRAS YN Y1 P1 AD1 So do taxes, just a slightly different amount
- 20. - the number of times a rise in national income exceeds the rise in injections 注入 of demand that caused it The Multiplier effect Fiscal Policy Effects the additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending (C) Reworded definition: 换句话说 Each $1 increase in G can generate more than a $1 increase in AD.
- 21. The Multiplier effect Fiscal Policy Effects 1 1 – MPC = - the number of times a rise in national income exceeds the rise in injections 注入 of demand that caused it G spending Equation: or 1 MPS = They are the same equation, some authors use one, some authors use the other
- 22. The Multiplier effect Fiscal Policy Effects 1 1 – MPC = - the number of times a rise in national income exceeds the rise in injections 注入 of demand that caused it G spending Equation: or 1 MPS = Tax Equation: or Tax Equation: or I will show the G spending equation first, then the Tax equation next.
- 23. 1.) The government buys airplanes from a domestic manufacturer. The Multiplier Effect Example:
- 24. 1.) The government buys airplanes from a domestic manufacturer. The Multiplier Effect Example: 2.) This is distributed to workers (wages) and owners ( profits or stock dividends).
- 25. 1.) The government buys airplanes from a domestic manufacturer. The Multiplier Effect Example: 2.) This is distributed to workers (wages) and owners ( profits or stock dividends). 3.) These people are also consumers and will spend a portion of the extra income.
- 26. 1.) The government buys airplanes from a domestic manufacturer. The Multiplier Effect Example: 2.) This is distributed to workers (wages) and owners ( profits or stock dividends). 3.) These people are also consumers and will spend a portion of the extra income. 4.) This extra consumption causes further increases in AD. Price level GDP AD
- 27. - the fraction of extra income that households consumes rather than save The Multiplier effect Fiscal Policy Effects Marginal Propensity to Consume (MPC) Example: 1.) if MPC = 0.8 2.) if income rises by $100 3.) then C consumption rises $80 The size of the multiplier depends on MPC.
- 28. - the fraction of extra income that households consumes rather than save The Multiplier effect Fiscal Policy Effects Marginal Propensity to Consume (MPC) Example: 1.) if MPC = 0.8 2.) if income rises by $100 3.) then C consumption rises $80 The size of the multiplier depends on MPC. You have only two choice with you money: Spend it or save it. This means every time you get more income you spend some and you save some. The money you spend is someone’s new income and they do the same thing. This is about to multiplied effects of this process.
- 29. Fiscal Policy Effects Marginal Propensity to Consume (MPC) The size of the multiplier depends on MPC. if MPC = 0.5 Multiplier = 2 if MPC = 0.75 Multiplier = 4 if MPC = 0.9 Multiplier = 10 Example sizes:
- 30. - the fraction of extra income that households saves rather than consumes Fiscal Policy EffectsMarginal Propensity to Consume (MPS) Marginal Propensity to Save Example: 1.) if MPS = 0.2 2.) if income rises by $100 2.) then C consumption rises $80 For one round, then do this for multiply rounds until the money has been all used up
- 31. Marginal Propensity to Consume Example… Big G Man
- 32. I will spend more G money and make a new bridge! Big G Man Marginal Propensity to Consume Example…
- 33. So I need to hire some workers to do it. Big G Man Marginal Propensity to Consume Example…
- 34. Big G Man 给钱 做桥 Workers Marginal Propensity to Consume Example…
- 35. Big G Man 给钱 做桥 G $10 billion Spending = AD $10 billion Workers Marginal Propensity to Consume Example…
- 36. Big G Man 给钱 做桥 G $10 billion Spending = AD $10 billion + … Workers Marginal Propensity to Consume Example…
- 37. Workers Some of this money with will spend (MPC) = 0.8 We have earned some wages! Some of this money we will save (MPS) = 0.2 Marginal Propensity to Consume Example…
- 38. Workers Let’s buy some new dresses! Marginal Propensity to Consume Example…
- 39. Workers 给钱 Dress maker 做衣服 ($10 billion) $8 billion用钱 $2 billion存钱。 Marginal Propensity to Consume Example…
- 40. Workers 给钱 Dress maker 做衣服 G $10 billion Spending + workers $8 billion Spending Marginal Propensity to Consume Example…
- 41. Workers 给钱 Dress maker 做衣服 G $10 billion Spending + workers $8 billion Spending + … Marginal Propensity to Consume Example…
- 42. Workers 给钱 Dress maker 做衣服 G $10 billion Spending + workers $8 billion Spending + … Marginal Propensity to Consume Example… Keep going and going until the math is finished
- 43. Big G Man $10 billion Spending Marginal Propensity to Consume Example…
- 44. Big G Man $10 billion Spending Workers + + $8 billion Spending Marginal Propensity to Consume Example…
- 45. Big G Man $10 billion Spending Workers + + Dress maker + $8 billion Spending $6.4 billion Spending + Marginal Propensity to Consume Example…
- 46. Big G Man $10 billion Spending + … Workers + + Dress maker + $8 billion Spending $6.4 billion Spending + +… Marginal Propensity to Consume Example…
- 47. Big G Man + … Workers + + Dress maker G $10 billion Spending + MPC = 0.8 of each round of income’s spending 1 1 – MPC = Marginal Propensity to Consume Example…
- 48. Big G Man + … Workers + + Dress maker MPC = 0.8 of each round of income’s spending 1 1 – MPC = Multiplier = 5 Marginal Propensity to Consume Example…
- 49. Big G Man + … Workers + + Dress maker G $10 billion Spending = AD $50 billion x Multiplier of 5 Marginal Propensity to Consume Example…
- 50. The Multiplier Effect A $10billion increase in G initially shifts AD to the right by $10billion. Y P AD1 P1 AD2 Y1 Y2 $10 billion
- 51. The Multiplier Effect A $10billion increase in G initially shifts AD to the right by $10billion. The increase in Y causes C to rise, which shifts AD further to the right. Y P AD1 P1 AD2 AD3 Y1 Y3Y2 $10 billion
- 52. The Multiplier Example Formula: AD = C + I + G + (X – M)Government spending Y = C + I + G + NX identity Y = C + G I and NX do not change Y = MPC Y + G because C = MPC Y solved for Y1 1 – MPC Y = G The multiplier
- 53. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRAS Ok let’s try again! Big G Man
- 54. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRASLet’s check the GDP spending numbers Big G Man
- 55. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRASLet’s check the GDP spending numbers AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man
- 56. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRAS AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man Our country has a $10 billion shortfall in AD
- 57. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRAS AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man If I know the MPC in my country is 0.8
- 58. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRAS Then I use that in this equation 1 1 – MPC = = 1/1-0.8 = 1/0.2Big G Man
- 59. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRAS 1 1 – MPC = = 1/1-0.8 = 1/0.2 = 5 Big G Man Now I know the multiplier!
- 60. Marginal Propensity to Consume (MPC) Price level GDP AD SRAS PE YN Y1 P1 LRASI only have to spend $2 billion and that will equal $10 billion in total spending! AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man
- 61. Marginal Propensity to Consume (MPC) Big G man Price level GDP AD SRAS PE YN LRAS Hurry! Our Economy is saved!
- 62. Expansionary Fiscal Policy AD = C + I + G + (X – M) Government spending Price level GDP AD SRAS PE LRAS YN Y1 P1 AD1 So that is basically the spending side
- 63. Expansionary Fiscal Policy AD = C + I + G + (X – M) Taxes Price level GDP AD SRAS PE LRAS YN Y1 P1 AD1 Now for the Tax side
- 64. The Multiplier effect Fiscal Policy Effects 1 1 – MPC = - the number of times a rise in national income exceeds the rise in injections 注入 of demand that caused it G spending Equation: or 1 MPS = Tax Equation: or Tax Equation: or MPC 1 – MPC = MPC MPS = - MPC 1 – MPC = - MPC MPS = This one will be the example
- 65. The Multiplier Example Formula: AD = C + I + G + (X – M)Taxes Reduced taxes are not an injection of new money It “frees’” up current income into more disposable income Some is saved, some is spend, just like the Government Spending Multiplier but without the first injection of new money that is 100% spend.
- 66. 1.) The government reduces income taxes for people The Tax Multiplier Effect Example:
- 67. 2.) This is distributed to workers (wages) and owners ( profits or stock dividends). 1.) The government reduces income taxes for people The Tax Multiplier Effect Example:
- 68. 1.) The government reduces income taxes for people The Tax Multiplier Effect Example: 2.) People now have more disposable income (wages) and owners ( profits or stock dividends). 3.) These people are also consumers and will spend a portion of the extra income.
- 69. 1.) The government reduces income taxes for people The Tax Multiplier Effect Example: 2.) People now have more disposable income (wages) and owners ( profits or stock dividends). 3.) These people are also consumers and will spend a portion of the extra income. 4.) This extra consumption causes further increases in AD. Price level GDP AD
- 70. 1.) The government reduces income taxes for people The Tax Multiplier Effect Example: 2.) People now have more disposable income (wages) and owners ( profits or stock dividends). 3.) These people are also consumers and will spend a portion of the extra income. 4.) This extra consumption causes further increases in AD. Price level GDP AD However it is one less round then government spending it is a smaller multiplier
- 71. Price level GDP AD SRAS PE YN Y1 P1 LRAS Big G Man Tax Multiplier Example…
- 72. Price level GDP AD SRAS PE YN Y1 P1 LRAS AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man Our country has a $10 billion shortfall in AD Tax Multiplier Example…
- 73. What if instead of building a bridge and spending extra money like before, I just gave people tax cuts? Big G Man Tax Multiplier Example…
- 74. Big G Man WorkersBoss of Workers I will reduce all your taxes so you have more disposable income Tax Multiplier Example…
- 75. Big G Man WorkersBoss of Workers Hurry! I might even hire new workers! Tax Multiplier Example…
- 76. Big G Man WorkersBoss of Workers Hurry! I might even hire new workers! Tax Multiplier Example…
- 77. Big G Man WorkersBoss of Workers Hurry! Now we can buy more dresses! Tax Multiplier Example…
- 78. Price level GDP AD SRAS PE YN Y1 P1 LRAS AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man If I know the MPC in my country is 0.8 Tax Multiplier Example…
- 79. Price level GDP AD SRAS PE YN Y1 P1 LRAS Then I use that in this equation MPC 1 – MPC = = 0.8/1-0.8 = 0.8/0.2Big G Man Tax Multiplier Example…
- 80. Price level GDP AD SRAS PE YN Y1 P1 LRAS MPC 1 – MPC = = 0.8/1-0.8 = 0.8/0.2 = 4 Big G Man Now I know the tax multiplier! Tax Multiplier Example…
- 81. Price level GDP AD SRAS PE YN Y1 P1 LRASI have to cut taxes by 2.5 billion to get $10 billion in total spending! AD = Y1 = 90 billion current GDP AD =YN = 100 billion GDP Goal Big G Man Tax Multiplier Example…
- 82. Big G man Price level GDP AD SRAS PE YN LRAS Hurry! Our Economy is saved! Tax Multiplier Example…
- 83. The Multiplier effect Fiscal Policy Effects 1 1 – MPC = - the number of times a rise in national income exceeds the rise in injections 注入 of demand that caused it G spending Equation: or 1 MPS = Tax Equation: or Tax Equation: or MPC 1 – MPC = MPC MPS = - MPC 1 – MPC = - MPC MPS =
- 84. The Multiplier Effect So the Government can spend money and increase AD by a multiplier… Or the Government can decrease taxes an increase AD by a multiplier… So the Government spending has a bigger multiplier…
- 85. The Multiplier Effect So the Government can spend money and increase AD by a multiplier… Or the Government can decrease taxes an increase AD by a multiplier… So the Government spending has a bigger multiplier… However…
- 86. The Multiplier Effect So the Government can spend money and increase AD by a multiplier… Or the Government can decrease taxes an increase AD by a multiplier… So the Government spending has a bigger multiplier… However… Don’t forget the money isn’t free, it comes from the federal budget that has to be balanced, and if it’s in deficit this adds another problem.
- 87. AD = C + I + G + (X – M) Budget Deficit Problem: Crowding out: - Government spending and borrowing that may fail to increase AD and hurts 排挤 private investment. When the government has to borrow, it needs to borrow from the private sector. This could be private individuals, pension funds or investment trusts. It is argued that if the private sector buy government securities this will crowd out 排挤 private sector investment.
- 88. The Multiplier Effect So a quick example of this…
- 89. The economy is in recession. Shifting the AD curve rightward by $200billion would end the recession. A. If MPC = .8 and there is no crowding out, how much should the government increase G to end the recession? B. If there is crowding out, will the government need to increase G more or less than this amount? The Multiplier Effect Example:
- 90. The economy is in recession. Shifting the AD curve rightward by $200billion would end the recession. A. If MPC = .8 and there is no crowding out, how much should the government increase G to end the recession?
- 91. The economy is in recession. Shifting the AD curve rightward by $200billion would end the recession. A. If MPC = .8 and there is no crowding out, how much should the government increase G to end the recession? Multiplier = 1/(1 – .8) = 5 Answer: Increase G by $40billion to shift AD by 5 x $40billion = $200billion
- 92. The economy is in recession. Shifting the AD curve rightward by $200billion would end the recession. B. If there is crowding out, will the government need to increase G more or less than this amount?
- 93. The economy is in recession. Shifting the AD curve rightward by $200billion would end the recession. B. If there is crowding out, will the government need to increase G more or less than this amount? - Crowding out reduces the impact of G on AD. Answer: To offset this, the government should increase G by a larger amount, how much depends on the math involved.
- 94. Hope you understand That is all! Thank you!