Increased consumer confidence will increase consumption.
Consumer confidence, a measure based on household surveys of how positive consumers are feeling about the future, helps forecast consumption spending.
Every month, the Conference Board publishes an index of consumer confidence that many forecasters rely on.
The slope of the consumption function will be changed by a change in the marginal propensity to consume.
In Panel B of Figure 11.5, we assume that the consumption is fixed.
The con sumption function rotates as the MPC increases.
The function line gets more steep with this rotation.
Many recent home purchasers owe more than their homes are worth, and as a result some default on their loans and turn their property over to the lender.
Home equity is between $0.06 and $0.07.
The Congressional Budget Office estimated the United States based on forecasts for the largest component of net wealth for most families.
Home-equity wealth is more widely dispersed than wealth in the stock market due to the fact that it is more concentrated in the highest income brackets.
The reduced rate of economic other forms of wealth affects consumer spending.
The period from 1997 to 2006 was paradise for con.
Consumer wealth grew by $6.5 trillion and housing prices rose by 90 percent.
The consumption function allows us to look at more complex versions model.
The only difference between what we did in the preceding section and what we are about to do here is that we now recognize consumption increases with the level of income.
Consumption spending increases with income.
Spending is equal to output.
Expenditures are equal to output at this level.
In the same way as in the cor responding example in the preceding section.
The relation between saving and investment can be seen in equilibrium output.
Equilibrium output is determined by the level of income and savings.
The level of savings in the economy is not fixed.
The marginal of saving and the level of income is a concept from Chapter 9.
Households will increase their total savings as their income increases.
equilibrium income is determined by savings and investment.
The horizontal line is the level of investment in the economy.
The savings function is achieved by the upward-sloping line.
The savings function is in this equation.
There is a marginal propensity to save.
The savings function has a slope.
Investment was 40 and equilibrium output was 350.
Saving does equal that level of investment.
Saving is investment at the level of equilibrium output.
If there are changes in investment spending, we can use the income-expenditure model to see what happens.
At the original level of investment and at the new level of investment, equilibrium output is determined.
The result is that the increase in output always exceeds the increase in investment.
Let's look at the logic of the multipliers.
There is an increase in investment spending.
It will increase output, income, and aggregate demand by $20 million.
$20 million in additional income will lead to $16 million in increased consumer spending.
With an increase in consumer demand of $16 million, output, income, and aggregate demand will all increase.
This will increase consumer spending by $12.8 million.
The increased demand will lead to an increase in put, income, and aggregate demand of $12.8 million.
If we add up all the spending in the infinite rounds, we can conclude that the initial increase in investment spend will generate a total increase in equilibrium income of $100 million, far more than the initial $20 million with which we began.
The multiplier is 5 and it is $20 million.
As the MPC increases, the multiplier increases.
The multiplier is 1.6 if the MPC is 0.6 and 2.5 if it is 0.4.
The marginal propensity to consume increases when the multiplier increases.
The initial increase in investment spending leads to higher consumer spending.
Consumer spending will increase because con sumers will spend more of their income as the mul tiplier increases.
If the MPC is 0.8, they will spend an additional $0.80, whereas if the multiplier is 0.6, they will spend only an additional $0.60 The increase in output will be greater with a higher MPC.
The effect of any change in investment "multiplies" throughout the economy.
economies can recover quickly after disasters.
The United States does not appear to have evidence of this.
Daniel Riera-Crichton, Carlos Veigh, and Guillermo Vuletin found different results using data from a broad range of developed countries.
They pointed out that sometimes governments increase spending in good times and decrease spending in bad times.
We want to know what happens when governments increase spending in bad times because that is an important time when they want to use active fiscal policy.
They found the recessions when there was more slack in the economy when they looked at periods when both government spending increased and the economy had slower or negative growth.
This is more difficult to estimate government multipliers than others.
Exercise 3.9 and 3.10 are related.
When the economy is slowing down, politicians may increase government spending.
There are no sources for "Government Spending Multipliers recognizing how politicians respond to recessions, you might in Good Times and in Bad: Evidence from U.S. Higher government spending is thought to be causing a paper.
"Procyclical and Countercyclical Fiscal Multiplier: Evidence from Fortunately, economists have ways to handle this problem" was written by Guillermo Vuletin.
Bringing in govern taxes affect equilibrium income makes our income-expenditure model more realistic.
Increasing government spending or cutting taxes are some of the recommendations we hear in those debates.
The level of government spending and the level of taxation affects the level of GDP in the short run.
Changes in taxes can affect the supply of output in the long run through the way taxes can change incentives to work or invest.
We focus on the role of taxes and spending in determining demand for goods and services in the short run in this chapter.
Government spending plays a role in determining GDP.
An increase in government spending leads to an increase in output according to the panel.
Changes in government purchases have the same effect as changes in investment or consumption.
A $10 billion increase in government spending will increase GDP by $25 billion.
The multiplier for government spending is the same as the one for investment or consumption.
GDP and income are raised by an increase in government spending.
Consumers increase their spending as income increases.
Let's look at taxes.
We need to take into account that government pro grams affect households' disposable personal income--income that ultimately flows back to households (and thus consumption) after subtracting from their income of any taxes paid and after addition to their income of any transfer payments they receive, such as Social Security, unemployment Your income after taxes and transfer payments is only $90 if the government takes $10 net of every $100 you make.
After-tax income will decrease if taxes increase by $1.
The multipliers for taxes and government spending are different.
The formula for the tax multiplier is slightly different because the demand line does not shift by the same amount with taxes as it does with government spending.
The tax multiplier is negative because it decreases disposable income and leads to a reduction in consumption spending.
The tax multiplier is smaller due to the fact that an increase in taxes first reduces income of households by the amount of tax.
The decrease in consumer spending is less than the increase in taxes because the MPC is less than one.
If we increased both government spending and taxes at the same time, what would happen?
Equal increases in both government spending and taxes will increase GDP.
The balanced-budget multiplier in our model is always equal to one, according to the appendix.
GDP will increase by $10 billion if spending and taxes are both increased.
Fiscal policy, taxes, and government spending can be used to affect GDP.
If GDP is $6,000 billion, the marginal propensity to consume is 0.6.
If policymakers wanted to increase GDP by 1 percent, they would need $60 billion.
We need to increase government spending by only $24 billion.
An increase in government spending of $24 billion leads to an increase in GDP of $60 billion.
We need to cut taxes by $40 billion.
The $60 billion increase in GDP will be achieved by the 40 billion tax cut times.
Government spending and taxes must be increased by $60 billion.
Important factors are not included in the models we are using.
The same basic principles apply in real life.
Three members of the President's Council of Economic Advisers wrote a letter to Clinton in 1993 saying they thought the cuts in government spending were too large.
The decrease in GDP from the $20 billion spending cut would be $30 billion.
This was a small part of the GDP.
If GDP was expected to grow at 3 percent a year without the cuts, the advisers estimated that GDP would grow at 2.5 percent a year.
It was too late to influence the policy decisions.
In 1994, the U.S. government urged the Japanese to cut taxes to boost their economy.
The Japanese came up with a plan and presented it to the U.S. policymakers.
The Japanese were urged to take more aggressive actions after they thought the plan did not provide enough fiscalStimulus.
The Japanese adopted a more aggressive plan several years later.
The Japanese government raised taxes in 1997 and caused the country to go into a recession.
The Chinese economy was under pressure from the downturn in Asia and its own attempts to reform.
Increasing spending on domestic infrastructure, including roads, rails, and urban facilities, was one of the ways the Chinese government tried to prevent a severe economic slowdown.
The government increased spending for disaster relief in New York after the terrorist attack on the United States.
President Bush and Congress immediately began to work on additional spending programs and tax-relief pro grams to boost the economy.
President Obama's economic advisors used analysis to gauge the size of the package.
The multipliers ranged from 1 to 2.
The economic advisors argued that the size of the package was enough to offset the worst of the recession.
An increase in government spending will increase total planned expenditures for goods and services.
Cutting taxes will increase the after-tax income of consumers and lead to an increase in planned expenditures for goods and services.
Policymakers need to take into account the multipliers for government spending and taxes.
Keynes argued in the 1930s that governments should use active fiscal policy to fight recessions.
Aggressive fiscal policymaking is the best option policymakers have for bringing economies out of recessions.
Keynes played a major role in policy debates throughout his life.
Keynes's idea was that the economy could be stimulated even if the government spent money on wasteful projects.
Pyramids don't add to the stock of capital to produce goods and services.
Keynes said that building pyramids adds to planned expenditures and late GDP in the short run.
If the government spends the money wisely, we will be better off in the long run.
The principle of opportunity cost is shown in this example.
The sacrifice you make to get something is the opportunity cost.
We can carry things too far here.
Japan is notorious for its excessive public spending on infrastructure, driven in part by the central government's doing favors for local politicians by creating jobs in their districts.
Keynes's famous pyramids were compared by economists to the spending on bridges and roads in Japan.
One of the important facts in U.S. economic history can be explained with a slight addition to our basic model.
The graph shows that the U.S. economy has been stable after World War II.
After World War II, fluctuations in growth rates became smaller.
Hazlitt applies the same argument to public spending.
The taxes needed to finance the spending will mean less business for other firms, even though a government spending program may appear to increase business.
Government spending and taxes will crowd out other production of goods and services in the economy.
When the economy is full employment, Hazlitt's argument works.
The story is different in the Keynesian world when resources are underemployed.
The increase in spending will bring resources that are not being utilized into dows.
Imagine if a hoodlum threw the economy.
If there is excess capacity in the econ brick through the store window.
The store owner has to hire a firm to fix the window because the extra spending will increase output and not crowd a tragedy.
The logic of opportunity costs is temporarily suspended in the Keynesian world in order to generate business for the window repair firm.
The store owner paid money to the exercises.
The window repair business made money while the clothing store didn't.
The taxes and transfer payments can help the economy by stabilizing it.
Automatic stabilizers for the economy are taxes and transfers.
This is how the automatic stabilizers work.
When income is high, the government collects more taxes and pays less in transfer payments.
Consumer spending will be reduced because the government is taking funds from consumers.
When output is low, the government collects less in taxes and pays out more in transfer pay ments, increasing consumer spending because the government is putting funds into the hands of consumers.
Consumption can fall in bad times and rise in good times with the help of the automatic stabilizers.
The economy is stable without the need for decisions from Congress or the White House.
To see how automatic stabilizers work in our model, we must take into account that the government applies a tax rate to the level of income.
Suppose there is a single tax rate of 0.2 and income is $100.
The government would collect $20 in taxes.
The consumption function has income taxes.
The tax rate is adjusted for taxes.
With a higher tax rate, the government takes a larger portion of income, and less is leftover for consumers.
Raising the tax rate reduces the slope of the line.
This reduces output.
The slope of the line is changed by the change of the tax rate.