lectures in macroeconomics- charles w. upton fiscal policy-part 2
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Lectures in Macroeconomics- Charles W. Upton
Fiscal Policy-Part 2
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Fiscal Policy-Part 2
Changing the Experiment Again
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Fiscal Policy-Part 2
Changing the Experiment Again
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Let’s change the experiment again. This time, the government
gives everyone a $300 tax cut.
Fiscal Policy-Part 2
Changing the Experiment Again
Y
M
Po
ro
Let’s change the experiment again. This time, the government
gives everyone a $300 tax cut.Yes you have
seen this one before.
Fiscal Policy-Part 2
Changing the Experiment Again
Y
M
Po
ro
Let’s change the experiment again. This time, the government
gives everyone a $300 tax cut.Yes you have
seen this one before.
This tax cut is based on last year’s taxes,
so no incentives/disincentives to work.
Fiscal Policy-Part 2
Changing the Experiment Again
Y
M
Po
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Let’s change the experiment again. This time, the government
gives everyone a $300 tax cut.Yes you have
seen this one before.
This tax cut is based on last year’s taxes,
so no incentives/disincentives to work.
But there are possible impacts
on wealth.
Fiscal Policy-Part 2
Tax Cut, Bequest Motive
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If people have a bequest motive, no
change
Fiscal Policy-Part 2
Tax Cut, Bequest Motive
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If people have a bequest motive, no
changeNo change in wealth, just an
issue on when you write a check to the government
Fiscal Policy-Part 2
Tax Cut, no Bequest Motive
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If people do not have a bequest motive, wealth
is up
Fiscal Policy-Part 2
Tax Cut, no Bequest Motive
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M
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Fiscal Policy-Part 2
Tax Cut, no Bequest Motive
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Prices up, interest rates unsure (but probably up)
Fiscal Policy-Part 2
Tax Cut, no Bequest Motive
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Prices up, interest rates unsure (but probably up)But the change is
probably pretty small
Fiscal Policy-Part 2
A Summing Up
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Fiscal Policy-Part 2
A Summing Up
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A one time increase in government
spending pushes prices up, and
probably interest rates as well
Fiscal Policy-Part 2
A Summing Up
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Po
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A one time increase in government
spending pushes prices up, and
probably interest rates as well
If people have a bequest motive, it
makes no difference whether the increase
is financed by taxation or borrowing (ignoring the disincentive effects
of taxes).
Fiscal Policy-Part 2
A Summing Up
Y
M
Po
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A one time increase in government
spending pushes prices up, and
probably interest rates as well
If people have a bequest motive, it
makes no difference whether the increase
is financed by taxation or borrowing (ignoring the disincentive effects
of taxes).
With no bequest motive, it may make a small
difference.
Fiscal Policy-Part 2
A Summing Up
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A tax cut makes no difference if
there is a bequest motive.
Fiscal Policy-Part 2
A Summing Up
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A tax cut makes no difference if
there is a bequest motive.
With no bequest motive, it may make a small
difference.
Fiscal Policy-Part 2
Long Run Effects
• Let’s go back to our tax-financed spending increase.
• This is a temporary change.
• Its effects will eventually dissipate.
Fiscal Policy-Part 2
Long Run Effects
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Fiscal Policy-Part 2
Long Run Effects
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Fiscal Policy-Part 2
Long Run Effects
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No permanent impact
Fiscal Policy-Part 2
Prices
Po
No permanent impact
Fiscal Policy-Part 2
Prices
Po
No permanent impact
That means the change if initially
inflationary, will be deflationary as the impact wears off
Fiscal Policy-Part 2
Prices
Po
Fiscal Policy-Part 2
A Final Experiment
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Fiscal Policy-Part 2
A Final Experiment
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There is a permanent increase in government spending.
Fiscal Policy-Part 2
A Final Experiment
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There is a permanent increase in government spending.
We will assume a
foolish project.
Because it is a permanent increase it must be financed
by taxation.
Fiscal Policy-Part 2
A Final Experiment
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There is a permanent increase in government spending.
We will assume a
foolish project.
Because it is a permanent increase it must be financed
by taxation.
Any disincentive effects are small: people move
along their LR labor supply curve.
Fiscal Policy-Part 2
A Final Experiment
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Impact of Government
Spending
Fiscal Policy-Part 2
A Final Experiment
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Impact of Government
SpendingImpact of reduced wealth
Fiscal Policy-Part 2
A Final Experiment
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Impact of Government
SpendingImpact of reduced wealth
The proof is complicated,
but the two will exactly offset each other.
Fiscal Policy-Part 2
Ergo
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No change in Y curve!
Fiscal Policy-Part 2
The M Curve
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Fiscal Policy-Part 2
The M Curve
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Prices up, interest rates
down.
Fiscal Policy-Part 2
The M Curve
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Prices up, interest rates
down.
Over time, though,
interest rates unchanged,
prices up more.
Fiscal Policy-Part 2
End
©2004 Charles W. Upton. All rights reserved