Economics 1 – Lecture 18: Government Spending: Fiscal Policy
[youtube http://www.youtube.com/watch?v=TXPJeRJFuzs&fs=1&rel=0]
Introduction to Economics.
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[youtube http://www.youtube.com/watch?v=TXPJeRJFuzs&fs=1&rel=0]
Introduction to Economics.
Video Rating: 4 / 5
There is a very subtle, very important point made at 22:43.
When the government taxes $1, the effect on the CURRENT economy is a $1
* MPC/(1-MPC) decrease
When the government spends $1, the effect on the CURRENT economy is a $1 *
1/(1-MCP) increase
So $1 of government spending has a greater impact on the CURRENT economy
than a $1 tax because the governments MPC is 100%, they don’t save any of
their income.
HOWEVER, The tax effects more than just this years economy. A tax of $1
ALSO reduces SAVINGS by $1 – $1*MCP
That means that when you tax, you are also reducing FUTURE consumption and
investment.
This is a grotesque example of how Keynesian “math” justifies an expansion
of government activity. If we start from a basis analyzing the basic
actions of individuals and governments, we would come to a totally
different conclusion: that government intervention used to stimulate the
economy is more destructive than beneficial.