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Lecture 5 Chapter 9, Exams of Banking and Finance

Rice UniversityBanking and Finance

Multiplier model with government and net taxes endogenous. • Government spending multipliers (G and. TR). • Tax multiplier (t). • Balanced budget amendment ...

Typology: Exams

2022/2023

Uploaded on 03/01/2023

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Lecture 5
Chapter 9
• Government budgets – updated from text
• Multiplier model with government and net
taxes exogenous
• Multiplier model with government and net
taxes endogenous
• Government spending multipliers (Gand
T R)
• Tax multiplier (t)
• Balanced budget amendment
pf3
pf4
pf5
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pf9

Partial preview of the text

Download Lecture 5 Chapter 9 and more Exams Banking and Finance in PDF only on Docsity!

Lecture 5

Chapter 9

  • Government budgets – updated from text
  • Multiplier model with government and net taxes exogenous
  • Multiplier model with government and net taxes endogenous
  • Government spending multipliers (G and T R)
  • Tax multiplier (t)
  • Balanced budget amendment

NOTATION

  • Y output or income
  • C consumption
  • I investment
  • G government purchases of goods and ser- vices
  • T R government spending on transfer pay- ments (a negative tax)
  • t tax rate
  • T AX taxes
  • T net taxes (T AX − T R)
  • Yd disposable income (Y − T )

BALANCED BUDGET MULTIPLIER

(ONLY WHEN T IS EXOGENOUS)

If ∆G = 10 and ∆T = 10, then:

∆Y = (^110) −b − (^110) −bb = 10(^11 −−bb) = 10

So

∆ ∆YG = 1

MULTIPLIER MODEL, T ENDOGENOUS

  • Yd ≡ Y − T Definition
  • C = a + bYd Behavioral
  • Y = C + I + G Equilibrium condition
  • T AX = tY Behavioral
  • T ≡ T AX − T R Definition SOLUTION

Y = C + I + G = a + b(Y − tY + T R) + I + G = (^1) −ba+bt + (^1) −bb+btT R + (^1) −b^1 +bt(I + G) Re- duced form equation

If b =. 75 and t = 13 , then (^1) −.75+^1. 25 = 2 and (^1) −.75+.^75. 25 = 1. 5

CHANGE IN G

  • Government increases its purchases of goods and ser- vices, G.
  • Output (income), Y , increases to meet the added sales.
  • Taxes, tY , increase. So does disposable income, Yd, because t is less than 1.0.
  • Because of the increase in disposable income, con- sumption, C, increases. This further increases Y , etc. Reduced form equation is needed to see the final solution.