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المالية والسياسة المضاعف أثرThe multiplier effect and Fiscal Policy

الجزء السابع

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Recall: from the Silver Moon economy data we were able to determine the equilibrium level

For two sectors: = 500 m.

When government expenditure were added (100 m)

For three sectors with no taxes: = 700 m.

Y

e

Y e

The Multiplier effectThe Multiplier effect

i.e, an increase in G = 100 an increase in Y= 200e

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50100150200250300350400450500

AEAE

Y(AS)Y(AS) AE2(C+I+G)AE2(C+I+G)

YY eeAE1(c+I )AE1(c+I )

00 100 200 300 400 500 600

YY700

YYee

Y= 200

G = 100

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Note an increase in Y > G (I)

or Y / G > 1

This is called the multiplier effect

The expenditure multiplier = () اإلنفاق مضاعف

Change in GDP

initial change in spending )AE(

Multiplier effect: Chain reaction of an initial change in income and spending that leads to a greater change in final income and spending.

Multiplier effect: Chain reaction of an initial change in income and spending that leads to a greater change in final income and spending.

( ) : واإلنفاق الدخل في التغير االرتفاع من سلسلة االتنفاق مضاعف. ( أولى ( انفاق أو دخل في التغير االرتفاع عن الناجمة

( ) : واإلنفاق الدخل في التغير االرتفاع من سلسلة االتنفاق مضاعف. ( أولى ( انفاق أو دخل في التغير االرتفاع عن الناجمة

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Expenditure Multiplier in a closed economy: (a) with no taxes:

Example 1: For the Silver Moon economy (MPC = 0.5), weadded investment expenditure by $ 100 m. This increased spending created an equal income in the economy = $100 m. This income is partly consumed ($ 50 m) and partly saved ($50 m) according to MPC & MPS. The new consumption expenditure will create a new chain of income in the economy as follows:

) حيث الفضى القمر دولة اقتصاد (في MPC = 0 .5 بمقدار االستثمارى اإلنفاق في مليون 100االرتفاع

. هذا المقدار بنفس االقتصاد في جديدا دخال خلقأي ( نصفه استهالك يتم الجديد ) 50الدخل وادخار مليون) . االستهالكى اإلنفاق اآلخر ) 50النصف سيخلق مليون

يلي كما الدخول من :سلسلة

6

100

50 50

200

1001

502

C SYRound

100

3.1256.255 3.125

6.2512.54 6.25

12.5253 12.5

25 25

Note: In this example total income has multiplied by 2. $ 100 m is a direct increase in AE and the other $100 m is indirect induced additional spending.

7

300

75 25

400

1001

752

C SYRound

100

42.256.253 14

56.25 18.75

Note: In this example total income has multiplied by 4. $ 100 m is a direct increase in AE and the other $300 m is indirect induced additional spending.

Example 2: If for an other economy MPS = 0.25, and the government increased its spending by G= $100 m. This initial increase will Y= $100 m, leading to a chain reaction as follows:

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Note 1: The multiplier effect increases as MPS decreases (or as MPC increases ) Why ?

M =Y

MPS

Note 2: See appendix

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Appendix

Recall, at equilibrium for a simple two sectors economy:

ICYe

ICY

YI

YC

1

MPCYC

YI

11

MPSMPCIY 1

11

MPS1

10

100.9

50.8

40.75

MPC Expenditure Multiplier (M)

30.67

20. 5

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Examples :

1 – If an increase in autonomous consumption by $50 m leads to an increase in total income by $250 m. What is the value of MPC?

MPS1

aY

50250

MPS1

51MPS

54MPC

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Examples :

2 – If C = 100 + 0.8 Y

I1 = 100 I2 = 200 Y = ?

MPS1

0.21 5

Y X I

Y X

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Recall: from the Silver Moon economy data

For three sectors with no taxes: = 700 m.

When government applied a fixed tax of 100 m

For three sectors with fixed taxes: = 600 m.

Ye

Y e

Note the increase in taxes have not reduced Y by a multiplier = 2 (though MPC = 0.5)

The Tax Multiplier effectThe Tax Multiplier effect

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The Multiplier in a closed economy: (b) with taxes:

Note 2: See appendix

MPSMPC T

Ye

Note 1: MT < MI,G at all values of MPS ) the impact of

G > T on equilibrium income( why?

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Appendix

At T1 : Y1

e = b1

1 (a - bT1 + I + G)

At T2 : Y2

e = b1

1 (a – bT2 + I + G)

Ye = b1

1 ( – bT2 + bT1)

Ye = b1 (T2 - T1)b

Ye = b1 (T)b

MPSTY - MPC=

b1 b

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The Expenditure Multiplier in an open economy

Q: for an open economy, imports are considered a leakage from the

economy. Would the effect of the expenditure multiplier in the open

economy be smaller or bigger than in the case of a closed

economy?

MPS + MPM

1AEYe

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The GDP gap and Fiscal policy

Recall, the economy maybe below its potential output )GDP(even at a state of an equilibrium income.

0 2 4 6 8 10 12 14 16012345

Ye

Yf

Q

P

AS)SR(

AD

Ye

Yf

AS )LR(

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First: If Ye < Yf there exists a deflationary gapركودية ) (فجوة

This gap may be estimated by two methods:

(1) GDP gap : Yf - Ye

or(2) Expenditure gap : AE - AS at full employment

Q: What policies a government can apply to reduce this gap?

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ASASYYee

AEAE

0YY

AEAE

0

YY ff

GDP Gap

ExpenditureGap )deflationary gap(

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There are many policies a government can apply to reducethe deflationary gap or to generally change the real GDP and the price level. One of these policies is the Fiscal Policy.

Fiscal policy: Changes in government spending )on goods & services and transfer payment( and taxes designed to influence real GDP and the price level. Government spending and taxes are tools of the fiscal policy.

: المالية السلع ) السياسة على الحكومي االنفاق في التغيربهدف ( للضرائب باإلضافة التحويلية المدفوعات و والخدمات

. ان األسعار مستوى و الحقيقي المحلى الناتج على التأثيرالسياسة أدوات تعتبر والضرائب الحكومي المالية. االنفاق

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If an economy is facing a deflationary gap, the government can increase its spending and/or reduce taxes : expansionary fiscal policy ( مالية سياسة(توسعية

Note: In this case a budget deficit may occur ( تحققالميزانية في . (عجز

Q: What other policies a government can apply to reduce adeflationary gap ?

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Second: If Ye > Yf there exists an inflationary gapتضخمية ) (فجوة

This gap may be estimated by two methods:

(1) GDP gap : Yf - Ye

or(2) Expenditure gap : AE - AS at full employment

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ASASYYee

AEAE

0YY

AEAE

0

YY ff

GDP Gap

ExpenditureGap )inflationary gap(

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If an economy is facing an inflationary gap, the government can decrease its spending and/or increase taxes : contractionary fiscal policy ( مالية سياسة(انكماشية

Note: In this case a budget surplus may occur ( الميزانية فائضفي (تحقق

Q1: What other policies a government can apply to reduce an inflationary gap ?

Q2: Can the government affect the GDP gap with a balanced budget ?

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The Balanced Budget Multiplier effectThe Balanced Budget Multiplier effect

First: If Ye < Yf ( deflationary gap)

The government can increase both G & T by the same amount at the same time (G = T)

Q: Recall, that G & T have the opposite effect on AD, would not an equal change in G & T leave AD unaffected?

Second: If Ye > Yf ( inflationary gap)

The government can reduce both G & T by the same amount at the same time (G = T)

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Recall, changing G & T will stimulate further changesin income and spending according to the multipliers MG & MT.

Recall, the impact of MG > MT )Why?(

Note: M BB = Y/ )G=T( = 1 always at all values of MPC !

M BB = MG + MT

= 1 - b = 1 = Y

1- b 1- b G = T

Note: G = T )Same direction( equal change in Y

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What are the obstacles facing implementing fiscal policy?

تطبيق تواجه ان يمكن التي الصعوبات هي ما؟ المالية السياسة

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If MPC = 0.5 Ye = $700m YF = $1000m

What is the required change in: (1) G (2) T

to eliminate the GDP gap?

MG = 2

Y = YF - Ye = 300

G = = 150Y =

MT = -1

T = = -300Y

=

Examples: 1

Answers

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If MPS = 0.25G = 200 m T = 100

Ye = ?

MG = 4

MT = -3

YG = MG X G = 800= 4 X

YT = MT X T = -300= )-3( X

Y = 500

Examples: 2

Answer

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If MPC = 0.75 G = 50 T = -50

Ye = ?

MG = 4

MT = -3

YG = = 2004 X

YT = = 150)-3( X )-50(

Y = 350

Examples: 3

Answer

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If MPC = 0.8 G = 200 T = 200

Y = ?

MG = 5 YG = = 10005 X

200YT = = -800)-4( X 200

Y = 200

(a):

MT = -4

Or (b):Since G = T

MB

B

= 1

Y = G = T = 200

Examples:4

Answer