İKTİSADA GİRİŞ II - Deneme Sınavı - 2

If an economy suffers from a high rate of unemployment, the government, directly or indirectly, should encourage increase in private and/or public sector spending, i.e., it should follow an expansionary fiscal policy. This kind of fiscal policy is resulted in increasing production and creating new job opportunities.

Automatic stabilizers are the revenue and expenditure items in the government budget that automatically change to provide stability in the economy.The primary automatic stabilizer is the income tax.

In this economy, the level of equilibrium income is achieved when planned aggregate spending is equal to the production value. According to that, in case of total income is 750 billion TL, planned aggregate spending (C+I+G+X) value is 750 billion TL (530+100+150-30), as well.

we know that level of equilibrium income is 750 billion TL in this economy. If full employment level of income is 650 billion TL, then this economy is in equilibrium with excessive employment. Then, in order to achieve full employment level of income, equilibrium income should reduce by 100 billion TL. Therefore, government should apply
contractionary fiscal policy measures and reduce public expenditures. Accordingly, public expenditures should be reduced by using ∆Y = Expense Multiplier X ∆G mechanism.

In the table provided, since import spending is included into model autonomously, expenditure multiplier will be 1/MPS. In the model, value of marginal propensity to consume for each level of income will be calculated as:

Since MPC+MPS=1, MPS = 0.20. In the light of this information, if known components are substituted in

is obtained. In order to achieve full employment level of income or eliminate the inflationary gap, public expenditures should be reduced by 20 billion TL.

Public Expenditures, Taxes and Disposable Income

This last equation demonstrates that the total income of the country is being used in four different ways. This income is partly transferred to government as taxes (T), partly used to purchase the domestically produced goods and services, in other words, consumed (C), partly spent for imported goods and services (IM) and partly used for savings (S).

Public Expenditures, Taxes and Disposable Income

Autonomous tax is the part of total taxes that is independent of income.

Transfer expenditures

Transfer expenditures can be divided into four groups.

Economic Transfers: Transfers made by the government in order to support the investments of Public Economic Enterprises.

Financial Transfers: Transfers to special budget institutions and local authorities (universities, provincial administrations and municipalities etc.) made by government.

Social  Transfers: Transfers   made   by the  state    with the social purposes (financial aids for retirement            funds and association, student grants etc.).

Debt Payments: The  expenses not  paid in related fiscal year but in following years are assumed as transfer payments. These are  the       interest payments the government pays for domestic and international debts, amortization   of debt, expenses of previous years not paid in due date as well as debts of previous years.

Changes in Taxes

Tax multiplier is the coefficient that determines the effect of a change in taxes on the level of income and tax multiplier has a negative sign. This refers that tax changes will be reflected on income inversely, meaning that tax increase will decrease income, and tax decrease will increase income.

Changes in Public Expenditures and Taxes Together

What happens if government changes public expenditures along with taxes? For instance, if government increases public expenditures and finances this increases via taxes, what would be the effect of these changes? Considering previous examples, we can easily answer this question. As you remember, in the examples above, we calculated if government increases public expenditures 400 TL, income will increase 1000 TL. As in the example of taxes above, if government finances 100 TL of its public expenditure increase of 400 TL, 100 TL increase in taxes will decrease income by 150 TL. If we sum up these two changes, in case of financing increase of public expenditures partly by taxes, we can easily find the net change in income. According to our example, the net effect of public expenditures and taxes on income will be found as 1000 + (-150) = 850 TL

It is necessary to emphasize several points in this calculation. First, the effects of changes in public expenditures and taxes on income are opposite to each other. Second, in terms of absolute value, expenditure multiplier is higher than tax multiplier. The reason is that, change in public expenditures affects aggregate expenditures directly while a change in taxes affects consumption expenditures via disposable income, hence aggregate expenditures indirectly.

Changes in Public Expenditures and Taxes Together

What happens if government changes public expenditures along with taxes? For instance, if government increases public expenditures and finances this increases via taxes, what would be the effect of these changes?

It is necessary to emphasize several points in this issue. First, the effects of changes in public expenditures and taxes on income are opposite to each other. Second, in terms of absolute value, expenditure multiplier is higher than tax multiplier. The reason is that, change in public expenditures affects aggregate expenditures directly while a change in taxes affects consumption expenditures via disposable income, hence aggregate expenditures indirectly.

Changes in Public Expenditures and Taxes Together

When public expenditure increase is financed totally via taxes, the level of income increases is equal to expenditure increase. In case of changes in public expenditures and taxes are the same, the numerical value of net multiplier being equal to 1 is called as balanced budget multiplier.

Changes in Public Expenditures and Taxes Together

When public expenditure increase is financed totally via taxes, the level of income increases is equal to expenditure increase. In case of changes in public expenditures and taxes are the same, the numerical value of net multiplier being equal to 1 is called as balanced budget multiplier.

Expansionary Fiscal Policies

Expansionary Fiscal Policies Assume, for instance, that the economy is faced with an undesired high unemployment rate. By analyzing how government changes the fiscal policy to combat this problem, we will review the direction of fiscal policy. Since the current unemployment rate in this economy is higher than the desired, realized production level is far from providing full employment, and therefore, economy needs a higher expenditure level. According to Figure 4.3, while full employment output is realized in YF level, the economy actually can realize production level Y. As you see from the figure, income level Y is below the income level YF signifying full employment level of income. The situation in which an economy operates with insufficient expenditure level is called as having a deflationary gap. In order to reach the output level YF, in other words, to close the deflationary gap by eliminating spending gap in the economy,

it is required to shift aggregate expenditure function upward to position AE1 indicated with dashed lines. Shifting aggregate expenditure function to the position AE1, raises the employment level by increasing the output level.

For the government to shift aggregate expenditure function upward to production level YF, within the scope of what we learnt so far, there are three ways: First, the government may decrease taxes that will cause income level to raise by shifting consumption function upward. Second, by increasing public expenditures the government may ensure total aggregate expenditure function to move upward. Third, in order to make the investments to be more profitable, the government may encourage more investments by providing more tax discounts. As known, an increase in planned investments also shifts aggregate expenditure function upward. Arranging fiscal policy to increase aggregate expenditures is called as expansionary fiscal policy. Expansionary fiscal policy is the fiscal policy that aims to raise aggregate expenditures by increasing government spending and/or reducing taxes.

Expansionary Fiscal Policies

Expansionary Fiscal Policies Assume, for instance, that the economy is faced with an undesired high unemployment rate. By analyzing how government changes the fiscal policy to combat this problem, we will review the direction of fiscal policy. Since the current unemployment rate in this economy is higher than the desired, realized production level is far from providing full employment, and therefore, economy needs a higher expenditure level. According to Figure 4.3, while full employment output is realized in YF level, the economy actually can realize production level Y. As you see from the figure, income level Y is below the income level YF signifying full employment level of income. The situation in which an economy operates with insufficient expenditure level is called as having a deflationary gap. In order to reach the output level YF, in other words, to close the deflationary gap by eliminating spending gap in the economy,

it is required to shift aggregate expenditure function upward to position AE1 indicated with dashed lines. Shifting aggregate expenditure function to the position AE1, raises the employment level by increasing the output level.

For the government to shift aggregate expenditure function upward to production level YF, within the scope of what we learnt so far, there are three ways: First, the government may decrease taxes that will cause income level to raise by shifting consumption function upward. Second, by increasing public expenditures the government may ensure total aggregate expenditure function to move upward. Third, in order to make the investments to be more profitable, the government may encourage more investments by providing more tax discounts. As known, an increase in planned investments also shifts aggregate expenditure function upward. Arranging fiscal policy to increase aggregate expenditures is called as expansionary fiscal policy. Expansionary fiscal policy is the fiscal policy that aims to raise aggregate expenditures by increasing government spending and/or reducing taxes.

Mercantilism is the economic theory that relates the wealth of a society and a government to the precious metal stock of the country.

Autonomous tax is the part of total taxes that is independent of income.

Wage Payments are not a part of the transfer expenditures

Tax multiplier is 3 when MPC = 0,80 and MPI = 0,05

Tax multiplier is 2.15 when MPC = 0,70 and MPI = 0,05