Keynes Models: Lecture 5 - Economics UIO

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Questions and Answers

Match the following economic parameters to their effects on production (Y) in the Keynesian model:

Increase in exogenous consumption (zᶜ) = Increases production (Y) Increase in government spending (G) = Increases production (Y) Increase in autonomous taxes (zᵀ) = Decreases production (Y) Increase in exports (X) = Increases production (Y)

Match each variable with its description in the open economy Keynesian model:

Y = Total production or income in the economy Q = Level of imports X = Level of exports a = Marginal propensity to import

Match each fiscal policy action to its likely impact on the government budget balance:

Increase in government spending (G) = Decreases budget balance Decrease in autonomous taxes (zᵀ) = Decreases budget balance Increase in endogenous taxes (t) = Increases budget balance Decrease in government spending (G) = Increases budget balance

Match the definitions to the terms related to fiscal policy.

<p>Automatic stabilizer = Fiscal policy elements that automatically adjust to moderate economic fluctuations. Active fiscal policy = Deliberate changes in government spending or taxation to influence aggregate demand. Discretionary fiscal policy = Another term for Active fiscal policy. Budget Balance = The difference between government tax revenue and government spending.</p> Signup and view all the answers

Match policy effects on the multiplier to the impact on economic stability

<p>Larger multiplier = Greater impact from economic shocks, less stable economy Marginal Propensity to Consume = 0.4 = Multiplier effect is reduced, more stable economy Marginal Propensity to Import = 0.25 = Multiplier effect is reduced, more stable economy Tax Rate = 0.5 = Multiplier effect is reduced, more stable economy</p> Signup and view all the answers

Match these Keynesian open economy factors to their impact on total production.

<p>Increase in Exogenous Investment = Increases Y via the multiplier Increase in Exports = Increases Y via the multiplier Increase in the Marginal Propensity to Import = Decreases the size of the multiplier, but increases Q Increase in Autonomous Taxes = Decreases Y as it negatively impacts consumption</p> Signup and view all the answers

Match these key variables with their descriptions in an open Keynesian Model

<p>Y = Total Output I = Level of Investment Q = Level of Imports X = Level of Exports</p> Signup and view all the answers

Match each of the following variables to whether they are exogenous or endogenous.

<p>Consumption = Endogenous Investment = Endogenous Exports = Exogenous Autonomous Taxes = Exogenous</p> Signup and view all the answers

Match each component of aggregate demand in the Keynesian model with its typical determinant:

<p>Consumption (C) = Disposable income and consumer confidence Investment (I) = Interest rates and business expectations Government Spending (G) = Fiscal policy decisions Exports (X) = Foreign income and exchange rates</p> Signup and view all the answers

Match each parameter or term with how they impact the relationship between government spending and total output.

<p>Higher marginal propensity to consume = Increases the change in Y caused by gov spending Higher tax rate = Decreases the change in Y caused by gov spending Higher marginal propensity to import = Decreases the change in Y caused by gov spending Larger multiplier = Increases the change in Y caused by gov spending</p> Signup and view all the answers

Match the following types of fiscal policy with their descriptions:

<p>Expansionary fiscal policy = Increases government spending and/or decreases taxes to increase aggregate demand. Contractionary fiscal policy = Decreases government spending and/or increases taxes to decrease aggregate demand. Automatic stabilizers = Elements of fiscal policy that automatically adjust to moderate economic fluctuations. Counter-cyclical fiscal policy = Fiscal policy that works to counteract the business cycle.</p> Signup and view all the answers

Match different fiscal policies with the expected impact to the budget balance.

<p>Increase government spending = Causes budget balance to decrease Decrease tax rate = Causes budget balance to decrease Decrease Government Spending = Causes budget balance to increase Increase Import Rate = No direct change with the budget balance</p> Signup and view all the answers

Match each economic variable with its relationship with production (Y) in an open Keynesian model:

<p>Consumption (C) = Positively related; higher Y typically leads to higher C. Investment (I) = Positively related; influenced by Y and business sentiment Imports (Q) = Positively related; higher Y typically leads to higher Q. Exports (X) = Determined more by international factors than domestic Y</p> Signup and view all the answers

Match the following economic parameters to their impact on the size of the Keynesian multiplier:

<p>Marginal propensity to consume (c₁) = Has a positive relationship with the multipler. Marginal propensity to import (a) = Has a negative relationship with the multipler. Tax rate (t) = Has a negative relationship with the multiplier. Marginal propensity to invest (b₁) = Has a positive relationship with the multiplier.</p> Signup and view all the answers

Match these key economic facts with their description in an open Keynesian Model

<p>Higher Export Rate = Increases production, assuming all other factors are constant. Higher Import Rate = Decreases the impact any other given change has. Lower Tax Autonomy = Has a similar impact to higher Export Rates Total Investment = 0 = Production equals Exports plus Gov Spending plus Consumption</p> Signup and view all the answers

Match these terms regarding automatic stabilizers and their impact on Total Production.

<p>Higher income tax rates = Smaller the multiplier, but they decrease recession severity Transfer Payments = Smaller the multiplier, but they decrease recession severity Welfare payments are increased by gov = Decreases severity of recession severity, but causes budget deficit. Net change is unemployment payments equal to 2% increase = Decreases severity of recession severity, but causes budget deficit.</p> Signup and view all the answers

Match these tools a hypothetical government would use to try and stimulate Y.

<p>Decrease Income Tax Rate = Increase consumption via higher take-home pay. Increase Government Spending = A direct increase Y. Decrease Welfare Payments = Doesn't stimulate GDP. Subsidize increased production for Export Only = Increases production via higher export value</p> Signup and view all the answers

Categorize following variables as being either 'endogenous' or 'exogenous' in a basic Keynesian model

<p>Y = Endogenous G = Exogenous C = Endogenous T = Exogenous</p> Signup and view all the answers

How do each of these values impact the effectiveness of Government spending meant to stimulate an economy? (E.g causes small or large changes)

<p>Smaller Multiplier = Reduced impact of fiscal policy. Larger Tax Rate = Reduces impact of Stimulus. Higher Marginal Propensity to Import = Reduces Impact of Stimulus due to leakages as money leaves the country. Lower Government Debt = Can increase impact slightly due to lower future tax costs</p> Signup and view all the answers

Match the following policy instruments with their primary goals in economic stabilization:

<p>Lowering interest rates = Encouraging private investment. Increasing government spending = Directly boosting aggregate demand. Cutting taxes = Increasing disposable income and consumer spending. Increasing the money supply = Reducing debt costs and stimulating economic activity.</p> Signup and view all the answers

Match these variables to their impact on the government budget when Y decreases.

<p>Increased income transfers = Increases government spending. Decreased tax revenue = Decreased government revenue No change with X = No changes with government balance. No Change in Gov Purchases = No changes with government balance.</p> Signup and view all the answers

Match the descriptions to each economic concept.

<p>Multiplier Effect = A change in a one variable impacts GDP (Y) by more than one. Marginal Propensity to Import = How much imports increases if one's income increases by one unit. Endogenous Variable = A variable value is based other variables in the model. Real Investment = Investment on physical capital to be used in production.</p> Signup and view all the answers

Match the variable to their descriptions...

<p>G = Government Spending Y = Aggregate Production T = Taxes MPC = Marginal Propensity to Consume</p> Signup and view all the answers

Match these variables to their descriptions regarding Automatic Stabilizers.

<p>Higher Welfare Spending = Puts money into the economy during recessions. Progressive Tax System = Taxes don't increase nearly as for expansions and vice versa. Lower Tax Rate = Decreases the multiplier, but increases economic output Flat Tax System = Causes the Tax rate to be unresponsive to market fluctuations</p> Signup and view all the answers

How is the multiplier affected by each variable? (higher; lower)

<p>Marginal Propensity to Consume increase = Multiplier increases. Tax rate increases = Multiplier decreases. Marginal Propensity to Import Increases = Multiplier decreases. Marginal Propensity to Invest increases = Multiplier increases.</p> Signup and view all the answers

Match policy effect with the related impact to government finances. Assume government is trying to stabilize the economic output

<p>Increasing government purchases = Leads to decreased government balance. Lowering autonomous tax = Leads to decreased government balance. Increasing taxes = Leads to increased government balance. Decreasing government spending = Leads to increased government balance.</p> Signup and view all the answers

Match these factors to their impact on the multiplier. Assume positive values...

<p>Tax Rate = Leads to a smaller multiplier. Propensity to Import = Leads to a smaller multiplier as spending leaks out of the economy... Propensity to Consume = Leads to a larger multipier due to an increased re-spending... Propensity to Invest = Leads to a larger multiplier due to increases to wealth and positive economic attitudes.</p> Signup and view all the answers

Is it better to have government use spending or tax policy when trying to stimulate the economy?...

<p>Decreasing Taxes leads to... = People saving the money opposed to spending it. Increasing Government Spending lead to... = Directly contributes to GDP. Both affect the Government Deficit = Decreasing Taxes increase the deficit and Increases Spending increase it. The effectiveness of each is affected by individual MPC... = Low MPC leads to less of a stimulus impact.</p> Signup and view all the answers

How do each actions affect the government budget balance?

<p>Government spends more on building a road. = Government budget is decreased. Exports increase and imports stay the same. = No direct effect on the government's budget balance. Revenue from personal income taxes increases. = Government budget is increased. People on welfare increase in a recession. = Government budget is reduced.</p> Signup and view all the answers

Match the following economic concepts to their descriptions within the Keynesian model:

<p>Marginal Propensity to Consume (c₁) = The proportion of an increase in income that is spent on consumption. Government Spending (G) = Directly increases aggregate demand and has a multiplier effect on national income. Autonomous Consumption (zᶜ) = The level of consumption that occurs even when income is zero. Income Tax Rate (t) = Reduces the size of the multiplier by decreasing the amount of each additional dollar of income available for spending.</p> Signup and view all the answers

Match the variable with whether it's endogeneous or exogeneous in the provided Keynes model:

<p>Y (National Income) = Endogenous I (Investment) = Endogenous G (Government Spending) = Exogenous zᶜ (Autonomous Consumption) = Exogenous</p> Signup and view all the answers

Match the following concepts to their significance in determining the effectiveness of fiscal policy:

<p>Multiplier Effect = Amplifies the initial impact of government spending or tax changes on national income. Automatic Stabilizers = Reduce the impact of economic fluctuations without requiring explicit policy changes. Discretionary Fiscal Policy = Involves deliberate changes in government spending or taxation to influence aggregate demand. Budget Balance = The difference between government revenues and expenditures, which can be affected by fiscal policy decisions.</p> Signup and view all the answers

Match the following descriptions to their corresponding elements of open economy macroeconomics:

<p>Exports (X) = Represent goods and services sold to foreign countries, increasing domestic aggregate demand. Imports (Q) = Represent goods and services purchased from foreign countries, decreasing domestic aggregate demand. Marginal Propensity to Import (a) = The change in import spending resulting from a unit change in national income. Open Economy = Economy that interacts with other countries through trade, investment, and financial flows.</p> Signup and view all the answers

Match each term with its effect on the size of the Keynesian multiplier:

<p>Increase in the marginal propensity to consume (c₁) = Increases the multiplier. Increase in the income tax rate (t) = Decreases the multiplier. Increase in the marginal propensity to import (a) = Decreases the multiplier. Increase in autonomous investment (z') = No change to the multiplier.</p> Signup and view all the answers

Match each fiscal policy tool with its primary aim in stabilizing the economy:

<p>Increasing government spending (G) = Boosting aggregate demand during a recession. Decreasing taxes (T) = Increasing disposable income to stimulate consumption and investment. Increasing transfer payments = Supporting household incomes during economic downturns. Reducing government debt = Ensuring long-term fiscal sustainability.</p> Signup and view all the answers

Match the economic effect to whether it decreases or increases the effect of the multiplier:

<p>Income taxes increase = Decreases the multiplier effect Additional import spending increases = Decreases the multiplier effect Marginal investor confidence increases = Increases the multiplier effect Consumer spending increases = Increases the multiplier effect</p> Signup and view all the answers

Match each term with its definition in the equation $Y = C + I + G + X - Q$:

<p>C = Consumer Spending I = Investor Spending G = Government Spending X-Q = Net Exports</p> Signup and view all the answers

Match the policy to a description of its effect on net exports:

<p>A decrease in government spending to balance the budget = Will potentially increase net exports An increase in income taxes = Will potentially increase net exports An increase in exports by foreign nations = Will increase net exports An increase to import restrictions = Will increase net exports</p> Signup and view all the answers

Match the economic impact to whether it increases or decreases automatic stabilization:

<p>Incorporate a proportional income tax = Increases automatic stabilization Public work projects trigger when unemployment exceeds a threshold = Increases automatic stabilization Increase the marginal import rates = Decreases automatic stabilization Reduced consumption when income is stable = Decreases automatic stabilization</p> Signup and view all the answers

Match each category with what it does NOT change:

<p>Endogenous Variables = No change to level of taxes (t) Exogenous Variables = No change to level of investment (I) Automatic Stabilizers = No change to active stabilization policies Active Stabilization Policies = No change to automatic stabilizers</p> Signup and view all the answers

Match each goal with the policy that helps achieve that goal for Active Intervention:

<p>When investors are pessimistic, increase government spending = Reduce Z' If savings rates are too high, reduce income taxes = Increase t Reduce international demand, increase tariffs = Increase X During times of unemployment, extend unemployment benefits = Reduce zᵀ</p> Signup and view all the answers

Match the description of each to the positive and negative aspects of Multipliers:

<p>Increase G during times of investor pessimism = Positive multiplier Increase consumption spending during times of over-saving = Positive multiplier Increase taxes during times of economic boom = Negative Multiplier Increase import restrictions during times of low international demand = Negative Multiplier</p> Signup and view all the answers

Match each component to how it affects the Keynesian Model:

<p>Increase consumer confidence levels = Reduces the potential of economic down turn Increased investor optimism = Reduces the potential of economic down turn Increase income taxes = Slow the rate of economic growth Increase restrictions on imports = Slow the rate of economic growth</p> Signup and view all the answers

Match the result to its influence on the Keynes multiplier:

<p>Increase in government spending = Increases the multiplier Decrease in income tax = Increases the multiplier Government implements tariff restriction on imports = Decreases the multiplier Increase autonomous saving rates = Decreases the multiplier</p> Signup and view all the answers

Match the category with its descriptions in relation to the Keynesian Model:

<p>Automated Stabilizers = Help maintain a proper direction in the economy Positive Economic Multiplier = Growth in the system is faster and more consistent Negative Economic Multiplier = Slow the direction of the overall growth of the economy Government Intervention = Helps redirect the negative externalities in the system</p> Signup and view all the answers

Match the outcome and how it would affect the debt levels in a country:

<p>If a tax is cut and no decrease to spending = Debt levels increase If savings rates rise sharply and no policies in place = Debt levels increase If the government increases spending quickly and does not adjust taxes = Debt levels increase A rise in investor optimism spurs further investment = Debt levels potentially decrease</p> Signup and view all the answers

Match each economic policy to a description of its potential effect on economic stabilization:

<p>Increased government spending = Boosts demand during recessions but can increase debt. Tax cuts for lower-income households = Simulates spending and reduces levels of inequality. Increased unemployment benefits = Serves as an automatic stabilizer to support income during downturns. Trade restrictions = Limits import competition but disrupts global economic activity.</p> Signup and view all the answers

Match each of the economic elements to the correct potential impact on the economy:

<p>Government decreases the amount of money in Unemployment = Slows recovery to a drop in aggregate demand. The country increases the income tax rates = Overall decreases economic consumption. The country decreases support for companies to spend more money = Investor confidence decreases and economic growth slows. The consumers are very optimistic of the economics conditions = Overall increases the economic prosperity.</p> Signup and view all the answers

Match how each action affects the economic situation:

<p>High interest rates = Slow economic development. High tax rates = Slow economic development. Reduced consumption = Slow economic development. Reduced investment = Slow economic development.</p> Signup and view all the answers

Match what category falls under each of the scenarios.

<p>Government increases the import taxes = Affect Q Government increases interest rates = Affect I Consumer confidence slows = Affect C Other nations reduce tariffs to trade with your country = Affect X</p> Signup and view all the answers

Match the policy with its effect on the budget balance ($ \Delta B $) in the Keynesian model, assuming a negative shock to autonomous investment ($ \Delta z' $):

<p>Increase in Government Spending ($ \Delta G $) = $ \Delta B = \Delta z' &lt; 0 $ Decrease in Autonomous Taxes ($ \Delta z^T $) = $ \Delta B = \frac{\Delta z'}{c_1} &lt; 0 $ Automatic Stabilizers = Weakens the budget balance Active Fiscal Policy = Aims to stabilize economic activity</p> Signup and view all the answers

Match the following components with their effect when production (Y) increases in an open Keynesian economy:

<p>Consumption (C) = Increases, but less than it would in a closed economy due to taxes and imports Real Investment (I) = Increases due to the marginal propensity to invest Imports (Q) = Increase, leading to lower domestic production Taxes (T) = Increase, leading to lower consumption.</p> Signup and view all the answers

Match the term with its description in the context of Keynesian economics:

<p>Marginal Propensity to Consume ($c_1$) = The increase in consumption resulting from an additional unit of income. Marginal Propensity to Invest ($b_1$) = The increase in investment resulting from an additional unit of income. Marginal Propensity to Import (a) = The increase in imports resulting from an additional unit of income. Automatic Stabilizers = Mechanisms that reduce the impact of economic shocks without explicit policy changes.</p> Signup and view all the answers

Match the definition of the variable to the variable used in the Keynes model:

<p>Y = Total production C = Private consumption G = Government spending X = Export</p> Signup and view all the answers

Match the term with the appropriate type of policy it describes:

<p>Active Fiscal Policy = Requires decisions to change government spending or taxation. Automatic Stabilizers = Function through existing laws and regulations without new policy actions. Discretionary Policy = Involves active decisions by policymakers in response to economic conditions. Monetary Policy = Implemented by a central bank to influence interest rates and credit conditions.</p> Signup and view all the answers

Flashcards

Multiplicator effect

The effect on production when there is a shift in consumption. Production increases more than the initial change in consumption.

Marginal investment propensity

Marginal propensity to invest, reflecting how much more investment occurs as income increases.

Endogenous variables

Variables determined within the model (Y, C, I).

Exogenous variables

Variables determined outside the model (G, zC, T, zI).

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Import

The portion of income that is used to purchase imported goods and services.

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Endogenous netto taxes

The endogenously determined level of taxes that are automatically collected in a country

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Skatteraten (Tax rate)

The portion of income taken as tax.

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Stabiliserende finanspolitikk

Financial policy that helps control large swings in economy.

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Automatisk stabilisering

Automatic effects based only on rules and laws

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Aktiv stabilisering

Involves decision-making in order to stabilize the economic level in a country

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Offentlige budsjettbalansen

How much the state/government spends minus how much comes in from tax.

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Study Notes

  • Forelesning 5 is about Keynes models from the economics institute at UIO.

Multiplier Effect

  • The effect on production Y is ΔzC / 1 - c1
  • Since 0 < c1 < 1, ΔzC/1-c1 > ΔzC
  • The multiplier effect increases production more than the exogenous change in consumption.
  • This effect is stronger, the bigger c1 is
  • c1 comes from the consumption function, being C = zC + c1(Y − T)
  • When c1 is higher, more of the income is spent on consumption, causing income to increase more,.
  • When c1 is small, less of the income is spent on consumption, meaning income wont increase as much.

Endogenous Real Investments

  • The model presented is Y = C + I + G and C = zC + c1(Y − T), where 0 < c1 < 1
  • Introduce an equation for real investments to solve for all three variables: I = zI + b1Y, where 0 < b1 < 1
  • b1 represents the marginal investment propensity, indicating the extent of increased investment as income rises.
  • zI encompasses everything that affects real investments apart from income.
  • Endogenous variables: Y, C, I
  • Exogenous variables: G, zC, T, zI

Solving the Model

  • To solve: Y = C + I + G, C = zC + c1(Y − T), I = zI + b1Y
  • set equations 2 and 3 into equation 1
  • Meaning Y = zC + c1(Y − T) + zI + b1Y + G
  • Simplify to Y = zC + c1Y − c1T + zI + b1Y + G by solving the parenthesis.
  • Move terms with Y to the left side resulting in Y - c1Y - b1Y = zC - c1T + zI + G.
  • Factorise out the Y, which leads to Y(1 − c1 – b1) = zC - c1T + zI + G
  • Divide by the factor, delivering Y = zC − c1T + zI + G/ 1 - c1 — b1, where 1 − c1 – b1 > 0
  • This provides the equilibrium solution for Y, described only by exogenous variables and parameters.
  • With Y, the other variables C and/or I can be found as they are functions of Y and exogenous variables

Growth Form

  • ΔY = ΔzC − c1ΔT + ΔzI + ΔG / 1 - c1 — b1
  • ΔC = ΔzC + c1(ΔY – ΔT)
  • ΔI = ΔzI + b1ΔY
  • Exogenous increase in public use G is an example where ΔG > 0
  • Thus, ΔY = ΔG/ 1 - c1 — b1 > 0, so ΔC = c1ΔY > 0

The Multiplier

  • With exogenous investments ΔY = ΔG/ 1 − c1 > 0.
  • With endogenous investments, ΔY = ΔG / 1 − c1 − b1 > 0
  • Since b1 > 0, ΔG/1-c1 < ΔG/1-c1-b1
  • The multiplier effect is stronger this time
    • With endogenous investments, the multiplier effect becomes stronger.
    • Increased production raises both consumption and real investments.
    • These both lead to higher production.

Open Economy

  • Previously the economy was closed, but now import and export is included
  • Now Y = C + I + G + X − Q, where X is export and Q is import.
  • Exports remain exogenous because Norway is a small open economy; demand is determined by factors outside of direct control.
  • Import is a function of national income through the equation Q = aY, where a > 0, known as marginal propensity to import.

Endogenous Net Taxes

  • Taxes are introduced to the model.
  • T = zT + tY, where 0 < t < 1
  • t represents the fraction of income that is collected as tax, while zT represents exogenous taxes.

Keynes Model

  • Y = C + I + G + X − Q
  • C = zC + c1(Y − T)
  • I = zI + b1Y
  • T = zT + t1 Y
  • Q = aY
  • Endogenous variables: Y, C, I, T, Q
  • Exogenous variables: G, X, zC, zI, zT
  • The solution to the equation above is Y = zC – c1zT + zI + G + X / 1 – c1(1 − t) – b1 + a, with 0 < 1 − c1(1 – t) – b1 + a < 1
  • Y should only use parameters and exogenous variable, as well as have a specific value if the parameters are assigned.
  • The other variables should be found with values for Y, and where I = zI + b1Y, T = zT +tY, Q = aY.
  • With values of Y and T, C can be found through C = zC + c1(Y – T)

Growth Form

  • ΔY = ΔzC – c1ΔzT + ΔzI + ΔG + ΔX / 1 – c1(1 – t) – b1 + a
  • ΔC = ΔzC + c1(ΔY – ΔT)
  • ΔI = ΔzI + b1 ΔY
  • ΔT = ΔzT + t ΔY
  • ΔQ = a ΔY
  • Assume an increase in exports (ΔX > 0): ΔY = ΔX/ 1 – c1(1 – t) – b1 + a > 0 ΔI = b1ΔY > 0 ΔT = tΔY > 0 ΔQ = aΔY > 0
  • With ΔC = c1(ΔY – ΔT) ? 0
  • Since t is less than 1, implying the increase on taxes dempens the boost in consumption without negating more tax income.

Multiplier

  • The multiplier is now 1 / 1 – c1(1 – t) – b1 + a
  • Previously 1 / 1-c1 when focusing on endogenous comsumption, and 1 / 1 - c1 - b1 where real investments were also endogenous 1 / 1-c1 < 1 / 1-c1-b1, meaning multiplayers got bigger as investments got more endogenous

Stabilizing Fiscal Policy

  • Fiscal policy is stabilizing if it mitigates decreases in demand during economic downturns and curbs excessive increases in demand during booms.
  • Automatic stabilization Automatic stabilization is stabilisation effects of existing framework for T and G: Taking a model with a shock ΔzI < 0: ⇒ ΔY = 1/M ΔzI < 0 ⇒ ΔT = tΔY < 0, leading to reduced income tax and increased unemployment benefits.

Automatic Stabilisation Effects

  • Results in reduced changes in consumption, since ΔC = c1(ΔY – tΔY) = c1(1 – t)ΔY < 0
  • Stabilising effect through reduced GDP multiplier 1/M = 1 / 1 – c1(1 – t) – b1 + a
  • A large public sector damps cyclical variations
  • Higher taxes results in lower multiplier effects
  • Public use of products increase share of the economy

Automatic Budget Balance and Effects

  • Formula for the public budget balance B = T – G.
  • ΔB = ΔT – ΔG. in growth form
  • Automatic stabilisation, AB = ΔT – AG = tΔY = l tAzI / M < 0 implying fiscal policy improves budget balance

Discretionary Fiscal Policy

  • Discretionary fiscal policy involves decisions to change G, zT, or t to stabilize the economy
  • To dampen the fall in Y when zI is reduced, the government can increase G, reduce zT, or t

Active Fiscal Policy

  • AZ focus
  • ΔY = 0
  • Requires AG = –ΔzI , and the effect on the budget balance is AB = ΔT – AG = ( Δzi+ tΔY= -(-) =0.
  • AB = ΔT – AG= l = 0.

AZT Focus

  • ΔY = 0
  • Requires ΔZT= l ΔZI ,
  • There is little information about what makes the best active fiscal policy

Comparing Budget Balance and Activism

  • Budget balance with Δg: ΔB= ΔZ^1.
  • Budget balance with. ΔZT: - l.

Benefit of The Active Fiscal Policy

  • Maintain demand
  • Able to be used even if the monetary fund is not functional
  • There are no reduction of the economy

Cons of The Active Fiscal Policy

  • Time for Dosering
  • Unsecure economy
  • Politics will become asymentrical (easy to change tax, public oppinions)
  • The desire to stabilise in public offering and tax cuts
  • Might harm/negative effect on public budget plan Due to having a public that's debted and on loan (bad)
  • Monetary policy is leading the stabilized politics 1)Interest Rate is good tool of stabilization than every other budget cut/offering 2/3)There is a central bank that runs and fits to drive the economy over time

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