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.(Since the possi- ing by $75 billion.Thus, aggregate expenditure willbility that government purchases might depend on decline by $75 billion because of the direct impact ofincome doesn t matter for what we re going to do, the higher taxes.And what will happen in equilib-we ll return to the simple model in which only con- rium? As Exhibit 1 shows, with aggregate expendituresumption depends on income.) of $75 billion less, the new equilibrium level of outputFirst, let s see what happens if the government is lower by the multiplier (4) times the change in aggre-increases taxes by some amount, say $100 billion.We gate expenditure ($75 billion), which equals $300 bil-are thinking of taxes, an amount of dollars paid that lion.So output in the economy declines from $8 trillionis often called lump-sum taxes or fixed taxes, that is, to $7.7 trillion.95469_26_Ch26_p719-752.qxd 14/1/07 3:00 PM Page 734734 MODULE 6 Macroeconomic Foundationsthe government increases its purchases by $100 billionAggregate ExpendituresSECTI ON 26.6and pays for the increased purchases by raisingE XHI BI T 1and a Tax Cut$100 billion of additional taxes, the increase in gov-Y = AEernment purchases increases aggregate expenditureby $100 billion, but the increase in taxes reducesAE1 = $2,000 billion+ (0.75 × Output)aggregate expenditure by only 3/4 × $100 billion =8AE2 = $1,925 billion$75 billion.So the net effect is an increase in aggre-+ (0.75 × Output)gate expenditure of $25 billion.With a marginalpropensity to consume of three-fourths, the mul-7.7tiplier is 4, so the total impact on output is 4 ×$25 billion = $100 billion.Similarly, a balanced-budget decrease in government purchases and anequivalent decrease in taxes of $100 billion wouldlead to a reduction in aggregate expenditure of45°7.7 8 $25 billion, which would lead to a decline in outputReal GDP, Y of $100 billion.(trillions of dollars)Because the change in government purchasesincreases output by the multiplier times the changeAggregate expenditure declines by $75 billion as ain purchases, while a change in taxes decreasesresult of higher taxes.The new equilibrium level ofoutput by the multiplieroutput is lower by the multiplier (4) times the changein aggregate expenditure ($75 billion), which equals times the change in$300 billion.So output in the economy declines fromtaxes times the marginal balanced-budget$8 trillion to $7.7 trillion.propensity to consume, multipliera multiplier that reflects the effectthe balanced-budgetof government purchases and taxmultiplier is less thanchanges on aggregate expenditures,the multiplier we usedand is thus equal to 1So, just as a multiplier effect influences govern-before (which we ll callment purchases, the same thing happens with taxes.the basic expenditureBut the two cases are different in an important way.multiplier from now on).When we looked at an increase in government pur-In fact, if the basic expenditure multiplier is equal tochases, we found that output changed in the same1/(1 - MPC), the balanced-budget multiplier isdirection by the multiplier times the change in gov-ernment purchases.But in the case of an increase intaxes, output changes in the opposite direction by the1 MPC- =1multiplier times an amount equal to the marginal(1- MPC) (1- MPC)propensity to consume times the change in taxes.Inthe example, the tax increase of $100 billion causedaggregate expenditure to decline by 3/4 × $100 billion, 1/(1 - MPC) reflects the effect of government pur-which equals $75 billion.So a change in taxes of a chases on aggregate expenditure, and MPC/(1 - MPC)given amount affects aggregate expenditure by less reflects the effect of taxes on aggregate expenditure.than that amount, because the marginal propensity to The result of the equation equals exactly 1.So theconsume is less than 1.balanced-budget multiplier is equal to 1, no matterThis fact means that when the government what the marginal propensity to consume.Thus, as wechanges both government purchases and taxes by saw in our example, a balanced-budget increase inthe same amount, an event that some economists government purchases (and taxes) of $100 billioncall a balanced-budget increases output by $100 billion, while a balanced-change in fiscal policy, budget decrease in government purchases (and taxes)output is still affected.of $100 billion decreases output by $100 billion.balanced-budgetWe use the term, bal- We ve now developed the Keynesian expenditurechange in fiscalanced budget, to call model in complete detail [ Pobierz caÅ‚ość w formacie PDF ]