Transcript Macro_Module_21

Module 21
Fiscal Policy
and the Multiplier
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• Why fiscal policy has a multiplier effect
• How the multiplier effect is influenced by
automatic stabilizers
Multiplier Effects of an Increase in Government
Purchases of Goods and Services
• Initial increase in spending
• Indirect effect of increased spending
• Remember the multiplier
Multiplier Effects of Changes in Government
Transfers and Taxes
• Taxes and Transfers compared to
Government Spending
• Transfers
• Tax cuts
• Taxes
• Lump-sum taxes
Multiplier Effects of Changes in Government
Transfers and Taxes
Suppose the government decides to lower
income taxes by a lump-sum $1000.
The MPC = .90.
When Americans get $1000 back into their
pockets, they will save $100 (10%) and spend
$900 (90%).
$900 of new spending will now multiply by a
factor of 10 because M=1/.90 = 10.
So $1000 tax cut will eventually multiply
into $9000 of additional real GDP.
How Taxes Affect the Multiplier
• The reliance of taxes on real GDP
• Effect on the multiplier
• Automatic stabilizers
• Discretionary Fiscal Policy
What will YOU do with your
stimulus check?
Table 21.1 Hypothetical Effects of a Fiscal Policy with a Multiplier of 2
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers