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    Commodity Market

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    April liana
    Fiscal and monetary policy are the two channels through which governments can affect the macroeconomy. [1] Fiscal policy involves manipulating government spending and taxes. [2] Taxes reduce disposable income, which consumption depends on, while government spending and transfers are injections into aggregate demand. [3] Equilibrium output is found where aggregate demand from consumption, investment, and government purchases equals total planned supply.

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    Commodity Market

    Uploaded by

    April liana
    20 views12 pages
    Fiscal and monetary policy are the two channels through which governments can affect the macroeconomy. [1] Fiscal policy involves manipulating government spending and taxes. [2] Taxes reduce disposable income, which consumption depends on, while government spending and transfers are injections into aggregate demand. [3] Equilibrium output is found where aggregate demand from consumption, investment, and government purchases equals total planned supply.

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    4. Commodity Market

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    Fiscal and monetary policy are the two channels through which governments can affect the macroeconomy. [1] Fiscal policy involves manipulating government spending and taxes. [2] Taxes reduce disposable income, which consumption depends on, while government spending and transfers are injections into aggregate demand. [3] Equilibrium output is found where aggregate demand from consumption, investment, and government purchases equals total planned supply.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    20 views12 pages

    Commodity Market

    Uploaded by

    April liana
    Fiscal and monetary policy are the two channels through which governments can affect the macroeconomy. [1] Fiscal policy involves manipulating government spending and taxes. [2] Taxes reduce disposable income, which consumption depends on, while government spending and transfers are injections into aggregate demand. [3] Equilibrium output is found where aggregate demand from consumption, investment, and government purchases equals total planned supply.

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    of 12

    Commodity Market (3)

    Source : Principles of Economics Karl


    Case , Ray Fair by Fernando Quijano
    and Yvonn Quijano
    Goverment in the Economy
    • Government can affect the
    macroeconomy through two
    policy channels: fiscal policy and
    monetary policy.
    – Fiscal policy is the manipulation of
    government spending and taxation.
    – Monetary policy refers to the
    behavior of the Federal Reserve
    regarding the nation’s money
    supply.
    Fiscal Policy
    • Tax rates are controlled by the government, but tax
    revenue depends on changes in household income and
    the size of corporate profits, which the government
    cannot control.
    • Net taxes are taxes paid by firms and households to
    the government minus transfer payments made to
    households by the government.
    • Disposable, or after-tax, income (Yd) equals total
    income minus taxes. Yd  Y  T
    Adding Net Taxes (T) and Government Purchases (G)
    to the Circular Flow of Income
    • When government enters the picture, the aggregate
    income identity gets cut into three pieces:
    Yd  Y  T
    Yd  C  S Y  T  C S Y  C S  T
    • And aggregate expenditure (AE) equals:
    AE  C  I  G
    Adding Taxes to the
    Consumption Function
    C  a  bY
    C  a  bYd Yd  Y  T
    C  a  b( Y  T )
    • With taxes a part of the picture, the aggregate
    consumption function is a function of disposable, or
    after-tax, income.
    Equilibrium Output: Y = C + I + G
    C  100 .75Yd C  100 .75( Y  T )
    Finding Equilibrium for I = 100, G = 100, and T = 100
    (All Figures in Billions of Dollars)
    (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
    PLANNED PLANNED UNPLANNED
    OUTPUT NET DISPOSABLE CONSUMPTION SAVING INVESTMENT GOVERNMENT AGGREGATE INVENTORY ADJUSTMENT
    (INCOME) TAXES INCOME SPENDING S SPENDING PURCHASES EXPENDITURE CHANGE TO
    Y T Yd / Y  T (C = 100 + .75 Yd) (Yd – C) I G C+I+G Y  (C + I + G) DISEQUILIBRIUM

    300 100 200 250  50 100 100 450  50 Output8


    500 100 400 400 0 100 100 600  100 Output8
    700 100 600 550 50 100 100 750  50 Output8
    900 100 800 700 100 100 100 900 0 Equilibrium
    1,100 100 1,000 850 150 100 100 1,050 + 50 Output9
    1,300 100 1,200 1,000 200 100 100 1,200 + 100 Output9
    1,500 100 1,400 1,150 250 100 100 1,350 + 150 Output9
    The Leakages/Injections Approach
    • Taxes (T) are a leakage from the flow of income. Saving (S) is also
    a leakage.
    • In equilibrium, aggregate output (income) (Y) equals planned
    aggregate expenditure (AE), and leakages (S + T) must equal
    planned injections (I + G). Algebraically,
    AE  C  I  G
    Y  C S  T
    C S  T  C I  G
    S T  I  G
    The Government Spending Multiplier
    1
    Government spending multiplier 
    MPS
    The Tax Multiplier
     1 
     Y  (initial increase in aggregate expenditure)   
     MPS 

     1   MPC 
     Y  (   T  MPC )      T   
     MPS   MPS 

     MPC 
    Tax multiplier    
     MPS 

    • However, a tax cut has no direct impact on


    spending. The tax multiplier for a change in
    taxes is smaller than the multiplier for a
    change in government spending.
    Adding the International Sector
    • We can think of imports (IM) as a leakage from the circular flow and
    exports (EX) as an injection into the circular flow.
    • With imports and exports, the equilibrium condition for the economy is:

    Open-economy equilibrium: Y  C  I  G  ( X  M )

    • The quantity (EX – IM) is referred to as net exports.


    Increases or decreases in net exports can throw the
    economy out of equilibrium and cause national income to
    change.
    Terima Kasih

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