Macro 2

chap 3 aggregate demand and
fiscal policy (33,34)

Complete
Column 0
Column 1 F
1. Aggregate demand (AD)

1.1 Definition
quantity of a g and s demanded in the eco at any given price
ADC: relation between price lv and quantity of out put (negative)
price lv: cal by CPI or GDP deflator
Quantity of output : real GDP
1.2 Components
💡 AD=C+I+G+NX
C change due to: income (p), (income) taxes (n: have to pay taxes, income
decrease, c decrease)
I: expected profitability (p), interest rate (n), price of key inputs, tax incentives
for I → cost of I
NX: trade policy, incomes of nations
chap 3 aggregate demand and fiscal policy (33,34) 1

1.3 Downward sloping: P negatively rela to component
of AD (ecp G fixed)
WEALTH EFFECT (P & C): P de → same money, more g a s → value/
purchasing power increase → richer → C in
INTEREST RATE EFFECT (P & I): P in → need more money to buy g & s → not
deposit money into bank, borrow from bank/sell bonds and assets , stock(co
phieu trai phieu) → interest rate in (reflect returns of investment and cost
(borrowing to invest) of investment) make asset more attractive → higher
interest to higher returns → easier to convert assets to money) → I de (cost of
I increase, profit de)
P de → need less money to buy → have excess money, buy financial assets
→ interest rate de (higher demand, seller lower returns, lower in) → I increase
(lower cost) to buy new housing, equipment...
interest-bearing/financial (a): sinh lai
EXCHANGE RATE (P & NX)
P in → interest rate in → foreigner investor desire more bonds (higher returns)

→ higher demand US money (convert money into dollar) → US dollar appreciated
→ US g a s more expensive, imported g cheaper → EX de, IM in → NX de
P de → interest rate de → foreigner investor have less desire to buy bond due
to lower returns → US dollar deteriorated → US g a s cheaper → EX in, IM de →
NX in
2. Fiscal Policy
2.1 Def
use of gov spending and taxes to influence eco outcomes
2.2 Role
Recession: employ expansionary fiscal policy(mo rong) lowering tax/and
increase gov spending → increase aggregate demand

eg: lower income tax → increase C; lower corporate tax → incre I
expansion: contractionary fiscal policy (that chat) incre tax or/and decrea gov
spending
→ reduce fluctuation during business cycle
2.3 EFFECT
a. Multiplier effect:
Gov spend $20 planes from B → B revenue increase by 20 → AD incr
income incre → wages, profit incre
C increa
further incre in AD
—>>> additional shifts in AD when expansionary fiscal policy increases income →

C incre (SHIFT ADC FURTHER TO THE RIGHT)
size of effect : depends responsiveness of consumers to incre in income.
Marginal propensity to consume (MPC): fraction that households consume

rather than save ( delta C/delta Y)
eg: MPC=O.8: for every extra dollar, spend $0.8, save $0.2
In a certain economy, when income is $400, consumer spending is $325. The
value of the multiplier for this economy is 3.33. It follows that, when income is
$450, consumer spending is
a. $360. For this economy, an initial increase of $50 in consumer spending

translates into a $266.67 increase in aggregate demand.
b. $360. For this economy, an initial increase of $50 in consumer spending

c. $341.67. For this economy, an initial increase of $50 in consumer spending
d. $341.67. For this economy, an initial increase of $50 in consumer spending


m=1/1-MPC → 3.33=1/MPS → MPS= 1/3.33 → MPC=1-MPS → delta C → delta
C + C = spending
note: apply for G, I and NX
eg:- NX decrease → national income decrease → more decrease in C
- I increase → advanced technology, equipment,... → higher production →

higher income → C increase
💡 MULTIPILER: 1/1-MPC
b. Crowding-out effect
G in → AD in → income in→ C in → money demand in ( not equalibrium, need
depress) by in interest rate → I de → AD de
—>>> reduction in AD when a fiscal expansion raises the interest rate
CONCLUSION: AD increase more or less than 20 depends on multiplier and

crowding out effect.
2.4 change in Taxes

Cut tax → household take-home pay in → spend some of extra → ADc shifts
right (depend on ME and CE. vice versa
households' perception:
expect tax cut is permanent → add substantially to financial resources → C

increase, AD shifts right more than expect tax cut is temporary
(tax multiplier = - MPC/MPS . (-): tax cut, demand up)
3. AUTOMATIC STABILIZERS
3.1 LIMITATIONS OF FP

crowding out effect
lags (độ trễ):
Changes G & T require Acts of Congress
the process can take months & years → economy's condition may have
changed.
3.2 AS
AS (Non-discretionary FP) changes in FP that stimulate AD when eco has
recession without policymakers having to take deliberation action
Tax system: recession, taxes fall automatically
G: recession → more unemployment insurance → gov spend on these

proprams automatically

Macro 2

Uploaded by

Copyright:

Available Formats

Macro 2

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Macro 2

Uploaded by

Copyright:

Available Formats

chap 3 aggregate demand and

fiscal policy (33,34)

1. Aggregate demand (AD)

ADC: relation between price lv and quantity of out put (negative)

price lv: cal by CPI or GDP deflator

Quantity of output : real GDP

NX: trade policy, incomes of nations

chap 3 aggregate demand and fiscal policy (33,34) 1

EXCHANGE RATE (P & NX)

P in → interest rate in → foreigner investor desire more bonds (higher returns)

chap 3 aggregate demand and fiscal policy (33,34) 2

→ reduce fluctuation during business cycle

income incre → wages, profit incre

—>>> additional shifts in AD when expansionary fiscal policy increases income →

size of effect : depends responsiveness of consumers to incre in income.

Marginal propensity to consume (MPC): fraction that households consume

a. $360. For this economy, an initial increase of $50 in consumer spending

b. $360. For this economy, an initial increase of $50 in consumer spending

d. $341.67. For this economy, an initial increase of $50 in consumer spending

chap 3 aggregate demand and fiscal policy (33,34) 3

note: apply for G, I and NX

eg:- NX decrease → national income decrease → more decrease in C

- I increase → advanced technology, equipment,... → higher production →

—>>> reduction in AD when a fiscal expansion raises the interest rate

CONCLUSION: AD increase more or less than 20 depends on multiplier and

2.4 change in Taxes

expect tax cut is permanent → add substantially to financial resources → C

(tax multiplier = - MPC/MPS . (-): tax cut, demand up)

chap 3 aggregate demand and fiscal policy (33,34) 4

lags (độ trễ):

Changes G & T require Acts of Congress

Tax system: recession, taxes fall automatically

G: recession → more unemployment insurance → gov spend on these

chap 3 aggregate demand and fiscal policy (33,34) 5

You might also like