1. Lectures in Macroeconomics- Charles W. Upton Fiscal Policy-Part 3

2. The Argument The myth: –Increased Government Spending causes inflation. The reality: –It is a complicated story.

3. Fiscal Policy-Part 3 Must Increased Government Spending cause Inflation? Finance via wage taxes and money. There is no government debt.

4. Fiscal Policy-Part 3 Must Increased Spending be Inflationary? Increase G from  Y to  ’Y. Finance with a tax on interest income

5. Fiscal Policy-Part 3

6. The Net Effect Y M roro

7. Fiscal Policy-Part 3 The Net Effect Y M roro Y curve shifts up and to the right

8. Fiscal Policy-Part 3 The Net Effect Y M roro Y curve shifts up and to the right M curve shifts down and to the left.

9. Fiscal Policy-Part 3 The Net Effect Y M roro Y curve shifts up and to the right M curve shifts down and to the left. Effect on price level as shown here is deflationary. Interest rate rises

10. Fiscal Policy-Part 3 Permanent Effects No permanent change in inflation rate.

11. Fiscal Policy-Part 3 Conclusions Government spending has no impact on long run inflation rate. It can have an impact on short run inflation rate.

12. Fiscal Policy-Part 3 Conclusions Government spending has no impact on long run inflation rate. It can have an impact on short run inflation rate. Of course, if we finance spending by printing money, that is inflationary.

13. Fiscal Policy-Part 3 End ©2004 Charles W. Upton. All rights reserved