İKTİSADA GİRİŞ II

When marginal propensity to save is 0,30 and marginal propensity to import is 0,10 and in
case of an increase of 400 TL in public expenditures, if the government doesn’t increase the taxes, we determined the increase in income as above.

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.

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).

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

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.

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.

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.

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.

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 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 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.