Spending Of Incomes Through The New Tax example essay topic

Expansionary fiscal policy- The congress has decided to fix the economic problem of the deflationary gap of 1000 units in the GDP. The congress can either stimulate the economy in 2 ways, by either, raising government spending or cutting taxes. The decision is to cut taxes. The amount that the congress has to cut taxes by to stimulate the economy enough to full employment is given in the equation where the MPC, marginal propensity to consume is.

8. The MPC is a function of for every dollar that consumers have, they will spend 80 cents and will save 20 cents such the MPC is. 8. From this number you can derive the TXM tax multiplier which will tell you how much to cut taxes or raise taxes by to affect the GDP. How the multipliers effect the total GDP, a change in aggregate expenditures leads to a larger change in equilibrium in the GDP. The multiplier effect follows from to facts.

First the economy supports repetitive, continuous flow of expenditures and income through dollars are spent and received and then spent and received and so on. Since you can give the consumers a tax cut of a dollar, they wont spend the whole dollar, they will only spend 50 cents so you need to over compensate for this by giving them a tax cut high enough so they will spend enough to stimulate the economy. The TXM can show us this, the equation for the TXM is MPC/ (1-MPC) which is 4. So in this instance if you give consumers a tax cut of 300, they will go out and spend 240 dollars and save 60 dollars, but we need to increase the GDP by 1200, not 300, how does this work? Through the round by round effect. The consumers will spend 240 units on more goods and services which is someone else's income, they give up the 240 for goods and now the 240 is someone else's income to spend.

But the MPC is the determinate on how much of that 240 they now spend which is. 8, so 192 will be spent in buying more goods and services for that person / business. The recipient of that 192 will now say hey, we need to buy more to produce more, so lets spend. They end up spending 153.6 or.

8 of 192, this goes on and on and on until the total if you get the effective change in the GDP through constant circulation of currency, the multiplier and round by round effect. If you were to add up all of the spending of incomes through the new tax cut this would equal 1200, the needed change in the GDP, or the TXM (change in taxes), 4 300 = 1200. This however creates a larger deficit in the budget which is now 500, from 200. The UST will now have to increase the supply of bonds to 500, from 200 to finance the now larger deficit. This will bring the price per securities down so they are more appealing to buy in the bond market since there is an abundance or larger inventory of them. The Governments tax cut will get people to spend money to buy more goods and services requiring producers to supply more product for the increasing demand.

This will bring the unemployment rate closer to the natural rate of 5% since the spending of this new income increase will promote more demand for products and producers will need to produce more goods and services and employ more resources to support the increase in demand, but also inversely raise the inflation rate from a lower amount to 3%, the trade off of having a fully employed economy is a higher inflation rate. The stimulation will bring the trough to the trend line in the business cycle to a growth which is satisfactory of 3 - 3.5%. Since the UST is issuing more bonds, the government is demanding more money intake from the public. This shifts the demand for money out which creates a shortage in money which raises interest rates in loaning out money since it has become a scarce entity, or less common This will cause investors to crowd out essentially since the interest rates will rise causing Investors not willing to pay the new rate, and they drop out of the game.