Module 3 · Economics

Fiscal Policy

EN: Government spending, taxation, and the multiplier effect on aggregate demand.
VN: Chi tiêu chính phủ, thuế và hiệu ứng số nhân lên tổng cầu.

1. Government Spending Multiplier Core

About: Tells you how much aggregate demand changes per $1 of additional government spending. Higher MPC and lower tax rate → bigger multiplier. Foundation of Keynesian stabilization.Tóm tắt: Cho biết tổng cầu thay đổi bao nhiêu trên 1 đồng chi tiêu chính phủ. MPC cao và t thấp → multiplier lớn.

\[ \text{Multiplier} = \frac{1}{1 - MPC \cdot (1 - t)} \]

Components

MPC Marginal propensity to consume out of disposable income.
t Marginal tax rate.
MPS = 1 − MPC (marginal propensity to save).

Practice problem

MPC = 0.8, tax rate = 25%. What is the spending multiplier?

Show solution

Multiplier = 1 / [1 − 0.8(1 − 0.25)] = 1 / (1 − 0.6) = 1 / 0.4

= 2.5

2. Tax Multiplier Core

About: Smaller in absolute value than the spending multiplier (filtered through MPC). Negative because tax cuts boost AD. Tax cuts less effective than direct spending in stimulating demand.Tóm tắt: Nhỏ hơn (giá trị tuyệt đối) spending multiplier. Âm vì giảm thuế kích cầu. Giảm thuế ít hiệu quả hơn chi tiêu trực tiếp.

\[ \text{Tax multiplier} = -\,\frac{MPC}{1 - MPC \cdot (1 - t)} \]

Negative because a tax cut increases disposable income; smaller in absolute value than the spending multiplier.

Practice problem

MPC = 0.75, t = 20%. Compute spending and tax multipliers.

Show solution

Spending: 1 / [1 − 0.75(0.80)] = 1 / 0.40 = 2.5

Tax: −0.75 / 0.40 = −1.875

Spending multiplier 2.5; Tax multiplier −1.875

3. Balanced-Budget Multiplier Concept

About: Equal spending + tax increases yield multiplier of 1 — still expansionary because spending injects directly while tax effect filters through MPC. Famous textbook result.Tóm tắt: Tăng chi và tăng thuế cùng mức → multiplier = 1, vẫn mở rộng. Kết quả kinh điển.

Equal increase in spending and taxes → multiplier = 1 (still expansionary because spending injects directly while tax effect is filtered through MPC).

4. Fiscal Tools Concept

About: Spending = direct/fast. Taxes = indirect/slower. Transfers target groups. Auto stabilizers (progressive tax, UI) work without legislation. All have recognition + decision + impact lags.Tóm tắt: Chi = trực tiếp nhanh. Thuế = gián tiếp. Auto stabilizer hoạt động không cần luật. Đều có độ trễ.

Lever vs lag

Spending Direct, fast effect on AD.
Taxes Indirect — works through disposable income.
Transfer Targets specific groups (e.g. unemployment benefits).
Auto stab. Built-in (progressive tax, unemployment insurance).
Lags Recognition + decision + impact lag — fiscal policy slow to take effect.