I. Consumption and Saving (cont.)
{"Image DocumentName": "I. Consumption and Saving (cont.)", "Image ImageDescription": "G) Fiscal policy. 1. Affects desired consumption through changes in current and expected future income. 2. Directly affects desired national saving, Sd = Y \u2013 Cd \u2013 G. 3. Government purchases (temporary increase) a. Higher G financed by higher current taxes reduces after-tax income, lowering desired consumption Cd=C0+C1(Y-T), by less than the decline in current income. b. Even true if financed by higher future taxes, if people realize how future incomes are affected. c. Since Cd declines less than G rises, national saving declines. Sd =-(C0+G- C1T)+ (1\u2013 C1)Y. d. So government purchases reduce both desired consumption and desired national saving. 4. Taxes. a. Lump-sum tax cut today, financed by higher future taxes. b. Decline in future income may offset increase in current income; desired consumption could rise or fall. c. Ricardian equivalence proposition. (1) If future income loss exactly offsets current income gain, no change in consumption. (2) Tax change affects only the timing of taxes, not their ultimate amount (present value) (3) In practice, people may not see that future taxes will rise if taxes are cut today; then a tax cut leads to increased desired consumption and reduced desired national saving.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}