{"id":7693,"date":"2018-01-02T17:22:22","date_gmt":"2018-01-02T17:22:22","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-macroeconomics\/?post_type=chapter&#038;p=7693"},"modified":"2018-06-02T03:21:01","modified_gmt":"2018-06-02T03:21:01","slug":"adjusting-government-spending-in-the-income-expenditure-model","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/chapter\/adjusting-government-spending-in-the-income-expenditure-model\/","title":{"raw":"The Spending Multiplier and Changes in Government Spending","rendered":"The Spending Multiplier and Changes in Government Spending"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Determine how government spending should change to reach equilibrium, or full employment\u00a0(using the income-expenditure model)<\/li>\r\n<\/ul>\r\n<\/div>\r\nSuppose the economy is suffering from a recessionary gap due to insufficient aggregate demand. We can use the algebra of the spending multiplier to determine how much government spending should be increased to return the economy to potential GDP where full employment occurs.\r\n\r\n<span style=\"color: #333333;\">Recall that macro equilibrium in the income-expenditure model is found at the point where the level of GDP, or national income, equals aggregate expenditure. The formula for the aggregate expenditure is\u00a0<\/span>\r\n<p style=\"text-align: center;\"><span style=\"color: #333333;\">Aggregate Expenditure =\u00a0C\u00a0+\u00a0I\u00a0+\u00a0G\u00a0+\u00a0(X\u00a0\u2013\u00a0M).<\/span><\/p>\r\nFinally, note that this example includes income taxes; thus, people consume out of disposable income (or take-home pay). This is shown in the consumption equation below, which deducts taxes before spending.\r\n<div class=\"textbox exercises\">\r\n<h3>Exercise: Expansionary Fiscal policy<\/h3>\r\nSuppose the model is given by:\r\n\r\nY = National income\r\n\r\nT = Taxes = 0.3Y\r\n\r\nC = Consumption = 200 + 0.9 (Y \u2013 T)\r\n\r\nI = Investment = 600\r\n\r\nG = Government spending = 1,000\r\n\r\nX = Exports = 600\r\n\r\nY = Imports = 0.1 (Y \u2013 T)\r\n<p id=\"fs-idm103312544\"><strong>Step 1.<\/strong> Calculate the initial\u00a0equilibrium for this economy (where Y = AE).<\/p>\r\n\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>Y<\/td>\r\n<td>=<\/td>\r\n<td>200 + 0.9(Y \u2013 0.3Y) + 600 + 1000 + 600 \u2013 0.1(Y \u2013 0.3Y)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Y \u2013 0.63Y + 0.07Y<\/td>\r\n<td>=<\/td>\r\n<td>2400<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>0.44Y<\/td>\r\n<td>=<\/td>\r\n<td>2400<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Y<\/td>\r\n<td>=<\/td>\r\n<td>5454<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p id=\"fs-idm161376704\"><strong>Step 2.<\/strong> Assume that the full employment level of output is 6,000. What level of government spending would be necessary to reach that level? Since initial output is 5,454, GDP needs to be increased by 6,000 - 5,454 = 556. What increase in government spending (while incorporating the spending multiplier) will achieve this?<\/p>\r\nTo answer this question, plug in 6,000 as equal to Y, but leave G as a variable, and solve for G. Thus:\r\n<div id=\"fs-idm23967072\">\r\n<div class=\"MathJax_Display\" style=\"text-align: center;\"><span id=\"MathJax-Element-48-Frame\" class=\"MathJax\"><span id=\"MathJax-Span-1115\" class=\"math\"><span id=\"MathJax-Span-1116\" class=\"mrow\"><span id=\"MathJax-Span-1117\" class=\"semantics\"><span id=\"MathJax-Span-1118\" class=\"mrow\"><span id=\"MathJax-Span-1119\" class=\"mtext\">6000\u00a0=\u00a0200\u00a0+\u00a00.9(6000\u00a0\u2013\u00a00.3(6000))\u00a0+\u00a0600\u00a0+\u00a0G\u00a0+\u00a0600\u00a0\u2013\u00a00.1(6000\u00a0\u2013\u00a00.3(6000))<\/span><\/span><\/span><\/span><\/span><\/span><\/div>\r\n<div><\/div>\r\n<\/div>\r\n<p id=\"fs-idm117202880\"><strong>Step 3.<\/strong> Solve this problem arithmetically. The answer is: G = 1,240. In other words, increasing government spending by 240, from its original level of 1,000, to 1,240, would raise output to the full employment level of GDP.<\/p>\r\n\r\n<\/div>\r\nThus a Keynesian expansionary fiscal policy, increasing government spending by 240, would correct the recessionary gap in this example.\r\n<div class=\"textbox examples\">\r\n<h3>Watch It<\/h3>\r\nWatch the following video for a similar example.\r\n<script type=\"text\/javascript\" src=\"\/\/static.3playmedia.com\/p\/projects\/20361\/files\/2587545\/plugins\/11085.js\"><\/script><script src=\"https:\/\/www.youtube.com\/iframe_api\" type=\"text\/javascript\"><\/script>\r\n<iframe id=\"myytplayer\" src=\"https:\/\/www.youtube.com\/embed\/pOQWm4hS5uI?enablejsapi=1\" width=\"800\" height=\"470\" frameborder=\"0\"><\/iframe>\r\n\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7579\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Determine how government spending should change to reach equilibrium, or full employment\u00a0(using the income-expenditure model)<\/li>\n<\/ul>\n<\/div>\n<p>Suppose the economy is suffering from a recessionary gap due to insufficient aggregate demand. We can use the algebra of the spending multiplier to determine how much government spending should be increased to return the economy to potential GDP where full employment occurs.<\/p>\n<p><span style=\"color: #333333;\">Recall that macro equilibrium in the income-expenditure model is found at the point where the level of GDP, or national income, equals aggregate expenditure. The formula for the aggregate expenditure is\u00a0<\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"color: #333333;\">Aggregate Expenditure =\u00a0C\u00a0+\u00a0I\u00a0+\u00a0G\u00a0+\u00a0(X\u00a0\u2013\u00a0M).<\/span><\/p>\n<p>Finally, note that this example includes income taxes; thus, people consume out of disposable income (or take-home pay). This is shown in the consumption equation below, which deducts taxes before spending.<\/p>\n<div class=\"textbox exercises\">\n<h3>Exercise: Expansionary Fiscal policy<\/h3>\n<p>Suppose the model is given by:<\/p>\n<p>Y = National income<\/p>\n<p>T = Taxes = 0.3Y<\/p>\n<p>C = Consumption = 200 + 0.9 (Y \u2013 T)<\/p>\n<p>I = Investment = 600<\/p>\n<p>G = Government spending = 1,000<\/p>\n<p>X = Exports = 600<\/p>\n<p>Y = Imports = 0.1 (Y \u2013 T)<\/p>\n<p id=\"fs-idm103312544\"><strong>Step 1.<\/strong> Calculate the initial\u00a0equilibrium for this economy (where Y = AE).<\/p>\n<table>\n<tbody>\n<tr>\n<td>Y<\/td>\n<td>=<\/td>\n<td>200 + 0.9(Y \u2013 0.3Y) + 600 + 1000 + 600 \u2013 0.1(Y \u2013 0.3Y)<\/td>\n<\/tr>\n<tr>\n<td>Y \u2013 0.63Y + 0.07Y<\/td>\n<td>=<\/td>\n<td>2400<\/td>\n<\/tr>\n<tr>\n<td>0.44Y<\/td>\n<td>=<\/td>\n<td>2400<\/td>\n<\/tr>\n<tr>\n<td>Y<\/td>\n<td>=<\/td>\n<td>5454<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p id=\"fs-idm161376704\"><strong>Step 2.<\/strong> Assume that the full employment level of output is 6,000. What level of government spending would be necessary to reach that level? Since initial output is 5,454, GDP needs to be increased by 6,000 &#8211; 5,454 = 556. What increase in government spending (while incorporating the spending multiplier) will achieve this?<\/p>\n<p>To answer this question, plug in 6,000 as equal to Y, but leave G as a variable, and solve for G. Thus:<\/p>\n<div id=\"fs-idm23967072\">\n<div class=\"MathJax_Display\" style=\"text-align: center;\"><span id=\"MathJax-Element-48-Frame\" class=\"MathJax\"><span id=\"MathJax-Span-1115\" class=\"math\"><span id=\"MathJax-Span-1116\" class=\"mrow\"><span id=\"MathJax-Span-1117\" class=\"semantics\"><span id=\"MathJax-Span-1118\" class=\"mrow\"><span id=\"MathJax-Span-1119\" class=\"mtext\">6000\u00a0=\u00a0200\u00a0+\u00a00.9(6000\u00a0\u2013\u00a00.3(6000))\u00a0+\u00a0600\u00a0+\u00a0G\u00a0+\u00a0600\u00a0\u2013\u00a00.1(6000\u00a0\u2013\u00a00.3(6000))<\/span><\/span><\/span><\/span><\/span><\/span><\/div>\n<div><\/div>\n<\/div>\n<p id=\"fs-idm117202880\"><strong>Step 3.<\/strong> Solve this problem arithmetically. The answer is: G = 1,240. In other words, increasing government spending by 240, from its original level of 1,000, to 1,240, would raise output to the full employment level of GDP.<\/p>\n<\/div>\n<p>Thus a Keynesian expansionary fiscal policy, increasing government spending by 240, would correct the recessionary gap in this example.<\/p>\n<div class=\"textbox examples\">\n<h3>Watch It<\/h3>\n<p>Watch the following video for a similar example.<br \/>\n<script type=\"text\/javascript\" src=\"\/\/static.3playmedia.com\/p\/projects\/20361\/files\/2587545\/plugins\/11085.js\"><\/script><script src=\"https:\/\/www.youtube.com\/iframe_api\" type=\"text\/javascript\"><\/script><br \/>\n<iframe loading=\"lazy\" id=\"myytplayer\" src=\"https:\/\/www.youtube.com\/embed\/pOQWm4hS5uI?enablejsapi=1\" width=\"800\" height=\"470\" frameborder=\"0\"><\/iframe><\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_7579\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7579&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7579\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-7693\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Modification, adaptation, and original content. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>The Expenditure-Output Model. <strong>Authored by<\/strong>: OpenStax College. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/cnx.org\/contents\/QGHIMgmO@11.12:LJYhl4AE@11\/The-Expenditure-Output-Model\">https:\/\/cnx.org\/contents\/QGHIMgmO@11.12:LJYhl4AE@11\/The-Expenditure-Output-Model<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.4<\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Macro 3.11- Multiplier and Spending Practice- AP Macro. <strong>Provided by<\/strong>: ACDC Leadership. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.youtube.com\/watch?v=pOQWm4hS5uI\">https:\/\/www.youtube.com\/watch?v=pOQWm4hS5uI<\/a>. <strong>License<\/strong>: <em>Other<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":29,"menu_order":14,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Modification, adaptation, and original content\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"The Expenditure-Output Model\",\"author\":\"OpenStax College\",\"organization\":\"\",\"url\":\"https:\/\/cnx.org\/contents\/QGHIMgmO@11.12:LJYhl4AE@11\/The-Expenditure-Output-Model\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/contents\/bc498e1f-efe9-43a0-8dea-d3569ad09a82@4.4\"},{\"type\":\"copyrighted_video\",\"description\":\"Macro 3.11- Multiplier and Spending Practice- AP Macro\",\"author\":\"\",\"organization\":\"ACDC Leadership\",\"url\":\"https:\/\/www.youtube.com\/watch?v=pOQWm4hS5uI\",\"project\":\"\",\"license\":\"other\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"531c5639-2b74-49ce-9f08-9c2a5fb7bfa1, 9263a789-b50d-4237-9f3f-5701b0d8d41b","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-7693","chapter","type-chapter","status-publish","hentry"],"part":10308,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/7693","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/users\/29"}],"version-history":[{"count":32,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/7693\/revisions"}],"predecessor-version":[{"id":11340,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/7693\/revisions\/11340"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/parts\/10308"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapters\/7693\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/media?parent=7693"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/pressbooks\/v2\/chapter-type?post=7693"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/contributor?post=7693"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/wp-json\/wp\/v2\/license?post=7693"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}