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Lectures in Macroeconomics- Charles W. Upton Fiscal Policy-Part 1
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The Argument The myth: –Increased Government Spending causes inflation. The reality: –It is a complicated story.
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Fiscal Policy-Part 1 Our Starting Point Y M PoPo roro
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Fiscal Policy-Part 1 An Example Y M PoPo roro Suppose the government decides to increase spending by $X
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Fiscal Policy-Part 1 An Example Y M PoPo roro Suppose the government decides to increase spending by $X A one period spending increase on a foolish project
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Fiscal Policy-Part 1 An Example Y M PoPo roro Suppose the government decides to increase spending by $X A one period spending increase on a foolish project Financed by a surcharge on last year’s tax bill
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Fiscal Policy-Part 1 Why this Choice? Y M PoPo roro We know beneficial products (a new highway) can have a beneficial effect, raising A or K
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Fiscal Policy-Part 1 Why this Choice? Y M PoPo roro We know beneficial products (a new highway) can have a beneficial effect, raising A or K We also know that taxes on wages, consumption, etc can have disincentive effects.
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Fiscal Policy-Part 1 Why this Choice? Y M PoPo roro We know beneficial products (a new highway) can have a beneficial effect, raising A or K We also know that taxes on wages, consumption, etc can have disincentive effects. Here we are looking at spending per se
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Fiscal Policy-Part 1 What Happens Y M PoPo roro Y is up by $X because of the government’s spending.
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Fiscal Policy-Part 1 What Happens Y M PoPo roro Y is up by $X because of the government’s spending. Y is down by <$X because of reduced wealth and consumption
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Fiscal Policy-Part 1 What Happens Y M PoPo roro Y is up by $X because of the government’s spending. Y is down by <$X because of reduced wealth and consumption In part the increased demand is met by people working harder
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Fiscal Policy-Part 1 What Happens Y M PoPo roro Y is up by $X because of the government’s spending. Y is down by <$X because of reduced wealth and consumption In part the increased demand is met by people working harder The auctioneer notes that D Y -S Y = X-Y>0.
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro
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Fiscal Policy-Part 1 The M Curve Y M PoPo roro With wealth down,, Money Demand is down. Ergo, the M curve shifts up and to the left
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro This is a familiar case, “Spending Foolishly”
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro We know P is up, r is uncertain
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro We know P is up, r is uncertain As drawn, r is up; economists think this is the likely outcome
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro We know P is up, r is uncertain As drawn, r is up; economists think this is the likely outcome This is sometimes referred to as demand pull inflation (or cost push inflation)
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Fiscal Policy-Part 1 The Shift in the Y Curve Y M PoPo roro We assumed that there was an increase in Government Spending, financed by taxation. Could different financing scenarios lead to different results?
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Fiscal Policy-Part 1 Changing the Experiment Y M PoPo roro We assumed that there was an increase in Government Spending, financed by taxation. Could different financing scenarios lead to different results?
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Fiscal Policy-Part 1 Changing the Experiment Y M PoPo roro We assumed that there was an increase in Government Spending, financed by taxation. Could different financing scenarios lead to different results? Suppose the government just borrowed $X
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Fiscal Policy-Part 1 Changing the Experiment Y M PoPo roro We assumed that there was an increase in Government Spending, financed by taxation. Could different financing scenarios lead to different results? Suppose the government just borrowed $X If people have a bequest motive, no change
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Fiscal Policy-Part 1 Borrowing, No Bequest Motive Y M PoPo roro
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Fiscal Policy-Part 1 Borrowing, No Bequest Motive Y M PoPo roro Here there is a difference, albeit a small one
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Fiscal Policy-Part 1 End ©2004 Charles W. Upton. All rights reserved
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