Lesson 6 of 6 · All lessons in this module
- Monetary versus fiscal policy and the roles of fiscal policy
- Deficits, national debt and whether debt matters
- Fiscal policy tools and what makes a good tax
- The fiscal multiplier, balanced budgets and Ricardian equivalenceVideo lesson
- Fiscal stance and the difficulties of implementation
- Integrated cases: costing a fiscal package
Lesson 6 of 6 · 15 min
Integrated cases: costing a fiscal package
A fiscal case asks you to find the right propensity to consume, size the multiplier, compare spending with tax cuts, and then judge the stance with cyclical and inflation adjustments.
In short
- The MPC is measured on disposable income. Divide the change in consumption by the change in income after net taxes, not by gross income.
- Multiplier = 1 / [1 − c(1 − t)]. Use c from disposable income, then apply the tax factor once.
- A balanced budget raises output: the first round is ΔG − c·ΔT, and in the simple lump-sum model the total is equal to ΔG (multiplier of one).
- A debt-financed tax cut lifts spending by only c times the cut in the first round; under Ricardian equivalence households save it all and nothing happens.
- Stance is judged on the structural (cyclically adjusted) deficit, and inflation-adjusted deficits subtract inflation times the debt.
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