Macroeconomic: IS-LM Model

2007-05-20 7:55 am
Under IS-LM Model, how the national income will be affected if increase in government expenditure financed by an equal increase in taxes??

回答 (3)

2007-05-20 9:33 am
✔ 最佳答案
briefly speaking, Ye (eqm. income) increase.
for detail, pls refer to textbook. but the idea is that, mps >0, so for $1 income, people save some. If you DO NOT tax them, they use c*Y of their income. but when govt. use the money, govt. uses all. i.e. the whole sum.
for example, when G = 1 and T = 1. Govt. increase expenditure by $1 but household decrease expenditure by (1-s)$1 which is smaller than $1, so the net effect on natioanl income is positive. i.e. increase in Ye
2007-05-22 10:02 am
a.If the estimated expenditure equals the estimated revenue, the government is said to run a balanced budget.
b.When change in Government spending is equal to the net tax revenue, there is a balanced budget.

If increase in G is financed by increase in autonomous tax, slope of IS has no change.
--> IS finally shifts outward with the extent of the amount of increase in G.
--> Y rises

If increase in G is financed by increase in tax rate, slope of IS rises
--> expenditure multipluet falls
--> slope of IS rises and IS rotationally shifts outward
--> Y rises

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2007-05-20 7:58 pm
Agree with the above answer. Just add a bit more detail.

Since the effect of increase in government expenditure on national income (G) is greater than the effect of increase in tax ( - c * T), the automous expenditure increases and through mutilplier effect, the national income rises for every level of interest rate. So IS curve shifts to the right.

But since IS curve shifts to the right, more money is held for transaction purpose. Given fixed money supply, money for speculative purpose falls, which implies interest rate to rise too. The rise in interest rate would crowd out some private investment and would partially counteract the increase in national income. So the overall increase in national income is smaller than simple balanced budget multiplier.


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