Macroeconomics, Volume II by David G. Tuerck

Author:David G. Tuerck
Language: eng
Format: epub
Publisher: Business Expert Press

Voila! By spending an additional $1 million, the government creates $2 million in new output and with it the new jobs that became needed in order to make this new output possible.

Equation (3.25) provides the long way of calculating the effect on output. The shorter way is to take advantage of the formula presented in equation (3.24) to get

There are other policy instruments available to government. An alternative strategy would be to cut taxes, thus “putting money in people’s pockets.” Now suppose that, instead of purchasing goods or services, the government cuts taxes by $1 million or, equivalently, sends out checks to individuals for this amount.

A tax cut of $1 million does not immediately “inject” $1 million into the economy. The reason is that taxpayers save 50% of that amount. They spend only the remaining 50%. But, again, we are not finished, because there are the same unemployed workers who will be put to work as taxpayers spend that 50% of their tax cut. And so forth. The process can be laid out as follows (keeping in mind that a tax cut means that the change in taxes dT is negative):

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