Transcript Chapter 7 Multipliers, Government Budgets, and Net Exports

Chapter 7
Multipliers, Government
Budgets and Net Exports
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-1
Learning Objectives
• Analyse the impact of changes in the level
of investment on equilibrium real GDP,
income and employment—the multiplier
effect.
• Discuss the rationale for the presence of
the multiplier.
• Examine the difference that may exist
between the equilibrium level of output and
that corresponding to the full-employment
level of output.
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-2
Learning Objectives (cont.)
• Discuss the nature of recessionary and
inflationary gaps.
• Analyse the impact of government
purchases and taxes on equilibrium GDP.
• Introduce the macroeconomic effects of
foreign trade on equilibrium GDP.
• Apply our model to explain the concept of
the balanced-budget multiplier.
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Slides prepared by Muni Perumal, University of Canberra, Australia
7-3
Equilibrium GDP
• Fluctuates widely
• Investment and consumption of
durables is inherently unstable
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7-4
Autonomous Expenditure
Changes
• Shifts in the AE curve due to changes
in autonomous expenditure
–
result in new equilibrium levels of output
(GDP)
–
how much output changes by depends
on the size of the expenditure multiplier
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7-5
Expenditure Multiplier
• A change in autonomous expenditure
results in a change in equilibrium
income that is a multiple of the initial
change
• The multiplier is defined as the ratio
of the change in GDP arising from a
change in autonomous spending
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7-6
Changes in Equilibrium GDP and the
(C + I ) 1
Multiplier
(C + I ) 0
Private spending
(billions of dollars)
510
490
Equilibrium GDP
at I1 level of investment
470
450
Saving and investment
(billions of dollars)
430
0
45
o
Real GDP
390
450
470
490
If I
S
I1
increases...
I0
Real GDP
20
0
510
390
450
470
490
510
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Slides prepared by Muni Perumal, University of Canberra, Australia
7-7
Saving and investment
(billions of dollars)
Private spending
(billions of dollars)
Changes in Equilibrium GDP
and the Multiplier
(C + I ) 0
510
(C + I ) 2
490
Equilibrium GDP
at I2 level of investment
470
450
430
0
45
o
430
450
470
490
510
Real GDP
S
20
I0
I2
0
430
450
470
490
If I
decreases...
Real GDP
510
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Slides prepared by Muni Perumal, University of Canberra, Australia
7-8
The Multiplier Effect
• A change in autonomous spending
gives rise to a larger change in GDP
• The multiplier effect arises because
initial increase in aggregate
expenditure will induce successive
rounds of increased expenditure
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Slides prepared by Muni Perumal, University of Canberra, Australia
7-9
Multiplier and Marginal
Propensities
• A relationship exists between the
MPS (the amount of leakage) and the
multiplier
• Multiplier = 1/MPS = 1/(1 – MPC)
• The simple multiplier is defined as
1/MPS, when the leakage in the
economy is only saving
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7-10
Recessionary Gap
• The amount by which aggregate
expenditures are deficient to that
required to generate the full
employment level of GDP
• Produces a concretionary impact upon
the economy
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7-11
Recessionary Gap (cont.)
Private
spending (billions of dollars)
(C + I )0
(C + I )1
}
Recessionary
Gap
Full Employment
0
45
o
470
490
510
Real GDP (billions of dollars)
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7-12
Inflationary Gap
• Is the amount by which aggregate
spending exceeds that required to
achieve full employment
• Produces an inflationary effect on the
economy
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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7-13
Inflationary Gap (cont.)
(C + I )1
Private
spending (billions of dollars)
Inflationary
Gap
(C + I )0
{
Full Employment
0
45
o
470
490
510
Real GDP (billions of dollars)
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7-14
Discretionary Fiscal Policy
• Deliberate manipulation of taxes (T )
and spending (G ) by government for
the purpose of altering real GDP and
employment, controlling inflation and
stimulating economic growth
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7-15
Government Purchases (G)
• Added to AE
• Changes to autonomous government
expenditure impact equilibrium real
GDP through the multiplier
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7-16
Three-Sector Equilibrium
• C + I + G = real GDP
and
• S=I+G
where
• C is after-tax consumption
• S is after-tax saving
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7-17
Government Expenditure and
Equilibrium GDP
C+I +G
S, I + G
(billions of dollars)
C +I +G
(billions of dollars)
Government
spending
$20 billion
0
45
C+I
C
o
470
510
550
Real GDP
(billions of dollars)
S
40
I +G
20
I
0
470
510
550
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
Real GDP
(billions of dollars)
7-18
Taxes and Equilibrium
GDP
• Taxes are assumed to be lump-sum
–
A tax that collects the same amount at each
level of GDP
• Reduces levels of both saving and
consumption
• How much S and C are affected
depends on the MPC and MPS
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-19
Taxes and Equilibrium GDP (cont.)
C+I +G
C+I+G
(billions of dollars)
$15 billion
decrease in
consumption
S + T, I + G
(billions of dollars)
0
45
Ca + I + G
o
490
550
Sa + T
40
S
Sa
I +G
I
20
0
Real GDP
($ billions)
$20 billion increase
in taxes
490
$5 billion decrease
in saving
550
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
Real GDP
( $billions )
7-20
Fiscal Policy over the
Business Cycle
Expansionary fiscal policy
• Increased G
• Decreased T
• or both
• Moves Budget towards a deficit in
recessionary times
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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7-21
Fiscal Policy over the
Business Cycle (cont.)
Contractionary fiscal policy
• Decreased G
• Increased T
• or both
• Moves Budget towards a surplus in
inflationary times
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7-22
The Multiplier and Fiscal
Policy
If the tax function is of the form
T = TLS + MPT(Y )
where MPT = marginal propensity to tax,
Multiplier =
1
[MPT + MPS (1 – MPT)]
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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7-23
Foreign Trade and
Equilibrium GDP
• Exports (X ) and imports (M ) are
introduced into the model
• Net exports (NX) = X – M
• AE = C + I + G + NX
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7-24
Exports (X)
• Level of X depends on foreign
countries’ income, not domestic
income
• Therefore X is an autonomous
variable in the model
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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7-25
Imports (M)
• Level of M is dependent on domestic
income or GDP
• Given autonomous exports, a rise in
imports due to a rise in income results
in a fall in NX
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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Equilibrium GDP with a rise in NX
Spending (billions of dollars)
(C + I + G + NX)2
(C + I + G)
510
(C + I + G + NX)0
490
470
450
45
0
o
450
470
490
510
Real GDP
($ billions)
530
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-27
Open-Economy Multiplier
• The introduction of foreign trade reduces:
–
the expenditure multiplier
–
the slope of the AE curve
• The open-economy multiplier
= 1/[MPS + MPM],
if taxes are lump sum with
no marginal propensity to tax
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-28
The Complex Multiplier for
an Open Economy
• The multiplier that arises when all
leakages—savings, taxes, and
imports—are taken into account:
1
k=
[MPT + MPS (1 – MPT) + MPM]
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-29
Balanced-Budget Multiplier
• The effect of an equal increase (or
decrease) of both the level of government
expenditure and taxation
• Increases (decreases) the level of
equilibrium GDP by exactly the amount of
the increase (or decrease) in G and T
• Thus, equal increases in G and T are
expansionary
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-30
Next Chapter:
Aggregate Demand
and Aggregate Supply
Copyright  2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
7-31