Lectures in Macroeconomics- Charles W. Upton Fiscal Policy-Part 2

Changing the Experiment Again Y M PoPo roro

Fiscal Policy-Part 2 Changing the Experiment Again Y M PoPo roro 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 PoPo roro 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 PoPo roro 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 PoPo roro 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 Y M PoPo roro If people have a bequest motive, no change

Fiscal Policy-Part 2 Tax Cut, Bequest Motive Y M PoPo roro If people have a bequest motive, no change No change in wealth, just an issue on when you write a check to the government

Fiscal Policy-Part 2 Tax Cut, no Bequest Motive Y M PoPo roro If people do not have a bequest motive, wealth is up

Fiscal Policy-Part 2 Tax Cut, no Bequest Motive Y M PoPo roro

Fiscal Policy-Part 2 Tax Cut, no Bequest Motive Y M PoPo roro Prices up, interest rates unsure (but probably up)

Fiscal Policy-Part 2 Tax Cut, no Bequest Motive Y M PoPo roro Prices up, interest rates unsure (but probably up) But the change is probably pretty small

Fiscal Policy-Part 2 A Summing Up Y M PoPo roro

Fiscal Policy-Part 2 A Summing Up Y M PoPo roro A one time increase in government spending pushes prices up, and probably interest rates as well

Fiscal Policy-Part 2 A Summing Up Y M PoPo roro 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 PoPo roro 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 Y M PoPo roro A tax cut makes no difference if there is a bequest motive.

Fiscal Policy-Part 2 A Summing Up Y M PoPo roro 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 roro

Fiscal Policy-Part 2 Long Run Effects roro

Fiscal Policy-Part 2 Long Run Effects roro No permanent impact

Fiscal Policy-Part 2 Prices PoPo No permanent impact

Fiscal Policy-Part 2 Prices PoPo No permanent impact That means the change if initially inflationary, will be deflationary as the impact wears off

Fiscal Policy-Part 2 Prices PoPo

Fiscal Policy-Part 2 A Final Experiment Y M PoPo roro

Fiscal Policy-Part 2 A Final Experiment Y M PoPo roro There is a permanent increase in government spending.

Fiscal Policy-Part 2 A Final Experiment Y M PoPo roro 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 Y M PoPo roro 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 Y M PoPo roro Impact of Government Spending

Fiscal Policy-Part 2 A Final Experiment Y M PoPo roro Impact of Government Spending Impact of reduced wealth

Fiscal Policy-Part 2 A Final Experiment Y M PoPo roro Impact of Government Spending Impact of reduced wealth The proof is complicated, but the two will exactly offset each other.

Fiscal Policy-Part 2 Ergo Y M PoPo roro No change in Y curve!

Fiscal Policy-Part 2 The M Curve Y M PoPo roro

Fiscal Policy-Part 2 The M Curve Y M PoPo roro Prices up, interest rates down.

Fiscal Policy-Part 2 The M Curve Y M PoPo roro 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