Fiscal Policy Government in the Economy Nothing arouses as much controversy as the role of government in the economy. Government can affect the macroeconomy in two ways: Fiscal policy is the manipulation of government spending and taxation.
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Adding Net Taxes (T) and Government Purchases (G) to the Circular Flow of Income
Simple government expenditures multiplier = GDP/G = 1/(1-MPC)
Simple tax multiplier = GDP/T = -MPC/(1-MPC)
The percentage began to fall in the mid 1990s.
discretionary fiscal policy
disposable, or after-tax, income
federal surplus (+) or deficit (-)
government spending multiplier
privately held federal debt
tax multiplierReview Terms and Concepts
The government spending and tax multipliers algebraically:
- decrease in spending:
= net increase in spendingAppendix A:Deriving the Fiscal Policy Multipliers
The Government Spending and Tax Multipliers Algebraically: