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In lesson 10a we just learned that a
small change in spending is multiplied as it works its way
through the economy and results in a larger change in total
spending. Here we will focus on FISCAL POLICY (FP). What can
the federal government do if there is high unemployment or
high inflation, and HOW MUCH should they do? (When we say
"federal government" we mean the president and congress NOT
the Federal Reserve.)
We know that if there is high
unemployment (UE) the government can increase spending or
cut taxes. Here we study HOW MUCH? We know that if there is
high inflation (IN) the government can decrease spending or
raise taxes, but HOW MUCH?
So how effective is FP? What is the
size of the multiplier? If the multiplier is large then a
small change in government spending (G) and taxes (T) will
have a big effect on RDO and therefore on UE and IN. If the
multiplier is small than a large change in G and T will have
a small effect on RDO and therefore on UE and IN.
The size of the multiplier (the
effectiveness of FP) depends on many different things. We
will study eight different multipliers, 8 different things
that affect the size of the multiplier and therefore affect
the effectiveness of FP. See the list in the Yellow
Pages.
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