NATIONAL INCOME DETERMINATION:

ROLE OF GOVERNMENT
PROF. IAG VALENSOY, JR.
THE GOVERNMENT and EQUILIBRIUM
INCOME
 Y=C
 Y=C+I
 Y=C+I+G
I = 50, MPC = 75%, Cb = 100
Y C I C+I
I = 50, MPC = 75%, Cb = 100
Y C I C+I

0 100 50 150

100 175 50 225

200 250 50 300

300 325 50 375

400 400 50 450

500 475 50 525

600 550 50 600

Target Income: 700B
I = 50, MPC = 75%, Cb = 100, How much G would be
needed to fill-in the gap to meet the target income?

Y C I G C+I C + I+G
 Y C I G C+I C + I+G

0 100 50 25 150 175

100 175 50 25 225 250

200 250 50 25 300 325

300 325 50 25 375 400

400 400 50 25 450 475

500 475 50 25 525 550

600 550 50 25 600 625

700 625 50 25 675 700

800 700 50 25 750 775

900 775 50 25 825 850

1,000 850 50 25 900 925

HOW DOES THE GOVERNMENT INFLUENCES
SPENDING?
1) TOTAL SPENDING CAN BE DIRECTLY INFLUENCED BY
CHANGING ITS PURCHASES OF GOODS AND SERVICES;
or
2) INDIRECTLY BY ALTERING THE DISPOSABLE INCOMES
OF PERSONS THROUGH CHANGES IN THE LEVEL OF
TAXATION OR TRANSFER OUTLAYS (PAYMENTS)

PUBLIC
TAXATION
SPENDING

FISCAL
POLICY
Appropriate fiscal measures:
 During times of deflation or recession, what fiscal
measure or strategy is appropriate to use? Deficit budget or
surplus budget? Impose tax cuts or raise taxes?

Higher
More levels of
incomes production
More
employment
More sales

More
spending
 During inflationary periods, how should the government
spend its budget? Budget deficit or surplus budget? Increase
tax rates or impose tax cuts?

Less
Less economic
business and activity
Less consumer
incomes demand for
Less sales goods and
services

Less
spending
Macroeconomic effects of fiscal
policies
EXPENDITURE
IMPACT

FISCAL POLICY
(TAX REDUCTION,
CAPITAL SPENDING)

FINANCIAL IMPACT SUPPLY IMPACT

C, I, G

C+I+G
C+I

0 GNP
Y1 Y2
C, I, G

Y
C+I+G

Ct + I + G

C
Ct
tax

0 GNP
Yt Yo