1. Lectures in Macroeconomics- Charles W. Upton A Tax Cut

2. The Y and M Curves P r Y M PoPo roro

3. A Tax Cut The Y Curve P r Y M PoPo roro Pick any point on the Y curve. D Y =S Y

4. A Tax Cut The Y Curve P r Y M PoPo roro Does the event (e.g. people become more confident) about the future mean D Y >S Y or D Y <S Y ? D Y =S Y

5. A Tax Cut The Y Curve P r Y M PoPo roro Suppose D Y >S Y. To get back on the Y curve, the Auctioneer would have to raise r or P. Thus Y curve shifts up and to the right. D Y =S Y

6. A Tax Cut The M Curve P r Y M PoPo roro Pick any point on the M curve. D M =S M

7. A Tax Cut The M Curve P r Y M PoPo roro Does the event (e.g. people become more confident) about the future mean D M >S M or D M <S M ? D M =S M

8. A Tax Cut The M Curve P r Y M PoPo roro D M =S M Suppose D M >S M. To get back on the M curve, the Auctioneer would have to raise r or lower P. Thus M curve shifts down and to the right.

9. A Tax Cut Some Problems The government gives everyone a $300 tax rebate this year, adding to the national debt.

10. A Tax Cut The Tax Cut Pick a point on the Y curve. P r Y M PoPo roro

11. A Tax Cut The Tax Cut Pick a point on the Y curve. D Y >S Y –Wealth up by a fraction of the tax cut; consumption up as well P r Y M PoPo roro D Y >S Y

12. A Tax Cut The Tax Cut Pick a point on the Y curve. D Y >S Y –Wealth up by a fraction of the tax cut; consumption up as well P r Y M PoPo roro D Y >S Y Or is it? If people have a bequest motive, then no impact. We come back to that case.

13. A Tax Cut The Tax Cut Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y P r Y M PoPo roro D Y >S Y

14. A Tax Cut The Tax Cut Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y P r Y M PoPo roro D Y >S Y Memo to the auctioneer: To cut D Y, raise r To raise D Y lower r

15. A Tax Cut The Tax Cut Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y P r Y M PoPo roro D Y >S Y

16. A Tax Cut The Tax Cut Pick a point on the Y curve. D Y >S Y The Auctioneer must lower D Y The Y curve shifts up and to the right P r Y M PoPo roro D Y >S Y

17. A Tax Cut The Tax Cut Pick a point on the M curve. P r Y M PoPo roro

18. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M P r Y M PoPo roro

19. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M –Wealth Up –Consumption Up –Money Demand Up P r Y M PoPo roro D M >S M

20. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M –Wealth Up –Consumption Up –Money Demand Up P r Y M PoPo roro D M >S M Well, maybe. Remember the issue of the bequest motive.

21. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M The Auctioneer must lower D M P r Y M PoPo roro D M >S M

22. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M The Auctioneer must lower D M P r Y M PoPo roro D M >S M Memo to the auctioneer: To cut D M, raise r To raise D M lower r

23. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M The Auctioneer must lower D M P r Y M PoPo roro D M >S M

24. A Tax Cut The Tax Cut Pick a point on the M curve. D M >S M The Auctioneer must lower D M The M curve shifts down and to the right. P r Y M PoPo roro D M >S M

25. A Tax Cut The Tax Cut The Y curve shifts up and to the right. The M curve shifts down and to the right. P r Y M PoPo roro

26. A Tax Cut The Tax Cut The Y curve shifts up and to the right. The M curve shifts down and to the right. Price level uncertain Interest rate up. P r Y M PoPo roro

27. A Tax Cut The Tax Cut II Pick a point on the Y curve. P r Y M PoPo roro Tax Cut II assumes a bequest motive

28. A Tax Cut The Tax Cut II Pick a point on the Y curve. D Y = S Y –No change in Z P r Y M PoPo roro D Y +S Y

29. A Tax Cut The Tax Cut II Pick a point on the Y curve. D Y =S Y The Y curve is unchanged! P r Y M PoPo roro D Y =S Y

30. A Tax Cut The Tax Cut II Pick a point on the M curve. P r Y M PoPo roro

31. A Tax Cut The Tax Cut II Pick a point on the M curve. D M = S M –No change in Z P r Y M PoPo roro D M = S M

32. A Tax Cut The Tax Cut II Pick a point on the M curve. D M = S M The M curve is unaffected! P r Y M PoPo roro D M = S M

33. A Tax Cut The Tax Cut II The Y curve doesn’t change. The M curve doesn’t change P r Y M PoPo roro

34. A Tax Cut The Tax Cut II The Y curve doesn’t change. The M curve doesn’t change P and r are unaffected. The tax cut is a non- event. P r Y M PoPo roro

35. A Tax Cut End ©2003 Charles W. Upton. All rights reserved