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Public Sector and Full Employment GDP

Public Sector and Full Employment GDP. Chapter 10 continued. Government Spending. An increase in gov’t spending boosts aggregate expenditure See the table on page 190 and graph on page 191 Gov’t spending is 20 billion at every level The new equilibrium is 550

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Public Sector and Full Employment GDP

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  1. Public Sector and Full Employment GDP Chapter 10 continued

  2. Government Spending • An increase in gov’t spending boosts aggregate expenditure • See the table on page 190 and graph on page 191 • Gov’t spending is 20 billion at every level • The new equilibrium is 550 • GDP = C (510) + Ig (20) + Xn (0) + G (20) • Remember that GDP was 470 when it was only C + Ig

  3. Tax Increase • Taxes reduce DI so C and S decreases at each level • Increase in taxes will lower the aggregate expenditure • See table 10.4 on page 191 and graph on page 192 • Tax is 20 billion at each level • The new GDP equilibrium is 490

  4. The sum of leakages (savings, imports and taxes) = sum of injections (investment, exports and G purchases) at the equilibrium GDP

  5. G vs tax cuts • An = increase in G spending and taxes increases the equilibrium GDP • An increase in G is direct and adds $20 billion (example) to aggregate expenditures • A decrease in T has indirect effect on aggregate expenditures because T cuts can be C (mpc) or S (mps). S is a leakage.

  6. BONUS Due TODAY OR BEFORE THE TEST • Page 201 • Number 4 • Number 5 • Number 7 (use figures 10-5 and 10-6 for help) Be sure to answer all parts of the questions.

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