2. 11.1 MULTIPLIER EFFECT 11.2 FISCAL POLICY 11.3 MONETARY POLICY 11.4 CROWDING-OUT EFFECT CHAPTER OUTLINE

7. Planned Investment Multiplier Y = C + I + G Y = [a + bY] + I + G Y = [a + b(Y- T)] + I + G Y = a + bY – bT + I + G Y (1 – b) = a – bT + I + G Y = (a – bT + I + G) [1/(1 – b)] --- Equation 11.1 ∆ Y/ ∆I = 1/(1 – b)

8. If planned investment (I) increase by the amount of ∆I, income (Y) will increase by: ∆ Y = ∆I X [1/(1 – b)] Since b = MPC, and MPS = 1 – MPC, the expression become: ∆ Y = ∆I X [1/(1 – MPC)] ∆ Y = ∆I X [1/MPS] Therefore, the multiplier for planned investment is ????

11. Figure: Government Spending Multiplier Example: ∆ Y = ∆G X [multiplier] = ∆G X [1/(1 – MPC)] = 50 X [1/(1 – 0.75)] = 50 X [4] ∆ Y = RM200 billion

13. Y = C + I + G Y = [a + bY] + I + G Y = [a + b(Y- T)] + I + G Y = a + bY – bT + I + G Y (1 – b) = a – bT + I + G Y = (a – bT + I + G) [1/(1 – b)] ∆ Y/ ∆T= -b/(1 – b) Tax Multiplier

14. If taxes increase by the amount of ∆T, income will increase by: ∆ Y = (-b) (∆T) X [1/(1 – b)] ∆ Y = (∆T) X [-b/(1 – b)] Since b = MPC, and MPS = 1 – MPC, the expression become: ∆ Y = ∆T X [-MPC/(1 – MPC)] ∆ Y = ∆T X [-(MPC/MPS)] Therefore, the multiplier for taxes are: -MPC/(1 – MPC) or -MPC/MPS

15. Taxes (T) : In an economy with a MPC of 0.75, a RM50 billion of tax cuts magnifies the aggregate expenditure three times higher through the multiplier effect. ∆ Y = ∆T X [multiplier] = ∆T X [-MPC/(1 – MPC)] = 50 X [-0.75/(1 – 0.75)] = 50 X [-3] ∆ Y = - RM150 billion Example

18. Balance Budget: Increase in G = Decrease in T Decrease in G = Increase in T ∆ = RM50 billion +∆G = – ∆T ∆ Y = + G effect –T effect = + RM200 billion – RM150billion = + RM50 billion Example

22. Unemployment Vs. Fiscal Policy

25. Inflation Vs. Fiscal Policy

29. Unemployment Vs. Monetary Policy

32. Inflation Vs. Monetary Policy

41. Crowding-out Effect

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