Module 20-21

• Automatic stabilizers will reduce the multiplier and swings in the business cycle.
  • Non-discretionary fiscal policies: 
    

    	Inflation	Recession
    Taxes	Increase	Decrease
    Transfer Payments	Decrease Unemployment insurance claims	Increase Unemployment insurance claims

Tax + Transfer Multiplier

\(\frac{MPC}{MPS}\)

• Changes in government purchases have a more powerful effect on the economy than equal-sized changes in taxes or transfers (because it's direct vs indirect).

change in Taxes/Transfer Payments = \(\frac{gap}{\frac{MPC}{MPS}}\)