İKTİSADA GİRİŞ II - Deneme Sınavı - 4

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.

For the government to shift aggregate expenditure function downward to output level Yf, within the scope of what we learnt so far, there are three ways: First, the government may increase the taxes. As we saw before, increasing taxes will pull down the aggregate spending by decreasing consumption expenditures, and hence, the level of equilibrium income will drop down toward full employment level, Yf. Second, government may cut public expenditures and this will pull down aggregate expenditure function and level of equilibrium income. Third, by changing tax laws government makes it hard for companies to invest. Emerging decrease in planned investments will pull down aggregate expenditure function, and hence, the equilibrium output level, as well. Arranging fiscal policy for depressing aggregate spending is called as contractionary fiscal policy.

According to the concept named as automatic stability providers or automatic stabilizers, some items existing in both spending and revenue sides of government budget, automatically change to diminish cyclical fluctuations and help providing stability. Although the automatic stabilizers are not enough to provide economic stability, these may help significantly. During economic recession and high unemployment periods, the tools in question are automatically step in and diminish the descending trend of GDP. On the other hand, during excessive economic activity with increasing inflationary pressure, these tools may help to diminish pressures mentioned.

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. Of the income taxes, automatic stabilizer characteristic is more clear and also significant in progressive income tax. Taxes collected over income are in the center of a tax system. When production (i.e., income) increases in an economy, total income tax revenue of the government increases as well and vice versa. In progressive income tax system, tax rate that a person has to pay increases with the income of that person obtains.

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.

Balanced budget multiplier is the net multiplier with a value of 1 when government expenditures and taxes change in the same amount and direction.

Government should undertake to ensure economic development, growth, stability and fair income distribution in the country.

Government should use the expending and taxing force (fiscal policy) to direct the economic life in the country.

In the ıncome determination model developed in the book government expenditures are assumed as exogenous, in other words, they are autonomous.

Tax multiplier is defined as (-MPC+MPI)/(MPS+MPI)

Tax multiplier = (-0.80+0.20)/(0.20+0.20)=-0.60/0.40=-1.5

Expenditure multiplier = 1/(MPS+MPI)= 1/(0.20+0.20)=1/0.40=2.5

Tax multiplier = (-MPC+MPI)/(MPS+MPI)=(-0.80+0.20)/(0.20+0.20)=-0.60/0.40=-1.5

Balanced budget multiplier is always equal 1

Depending on the balanced budget multiplier, total income increases equal to increase in government expenditures altough this increase is financed by the same amount increase in taxes.

Expansionary fiscal policy requires a decrease in taxes.

[1/(0.27+0.13)]*(360 million TL)= 900 million TL

MPS=1-MPC=1-0,73=0,27

[1/(0.27+0.13)]*290 million TL=725 million T