ECO 2006 - Chapter 9 - Part 3 (tax multiplier and balanced budget multipler)

Taxes(T)

A budget deficit is bad. It is like not paying your credit card bill each month and letting the bill get bigger. Where does the government get the money to pay for G(it's spending)?

Taxes(T)

A budget deficit occurs when spending(G) > ________

stay the same, 1

If G and T are raised the same amount then output will ______________ because the balanced budget multiplier is _______

80 cents

If the MPC was .8, and government cut taxes by $1, how much would C go up?

1100 = 700 + 100 + 300

In this diagram, equilibrium output is ________ where C is __________, U is ________, and G is ___________

40*-3 = -120 (go down by 12)

In this example the tax multiplier is -3 because the MPC is .75 and the MPS is .25 and the formula is -MPC/MPS. So if taxes are raised by 40, output will change by _________

-3 . The formula is -MPC/MPS which is -.75/.25

In this example the tax multiplier is ____________

40

In this example, G was increased by 40 and was paid for by and increase in taxes of 40. The increase in G caused output to go up by 160. The increase in taxes(T) caused output to go down by 120. Therefore the total change an output was ________ which matches the original increase in G.

.75, 4 = 1/(1 - 0.75)

In this example, the MPC is _________ so the government spending multiplier is __________

160

In this example, the multiplier is 4 because 1/(1 - .75) is 4. So an increase in spending(G) of 40 would cause equilibrium output(Y) to rise by _____________

$1, 80 cents

Remember AE = C + I + G. Assume that MPC is .80. Raising G by $1 would increase AE by _______ but cutting taxes by $1 would only increase AE by ___________

tax multiplier

The _____________ tells you how much output will increase if you cut taxes by a certain amount

tax multiplier

The amount that output changes when taxes are increased or decreases

1

The balanced budget multiplier is always equal to _____

T is increase

The balanced budget multiplier is valid when a raise in government spending(G) is paid for with an equal raise in ______________

increase

To "balance" the budget, any increase in spending(G) must be met with an ________ in taxes(T)

lowering taxes

We saw that raising G can increase output. We can do the same by raising C. The government can raise C by _____________

tax multiplier = -(MPC/MPS)

What is the formula for the tax multiplier?

balanced-budget multiplier

a change in government spending offset by an equal change in taxes results in a multiplier effect equal to one

Budget Deficit

a situation in which the government spends more than it takes in

tax multiplier

the ratio of change in the equilibrium level of output to a change in taxes