Question

Provide a concise explanation for the following concepts

1.Tax Multiplier

2.Balanced Budget Multiplier

3. Pigou Effect

4. Stabilization Policies

5. Expenditure Hypotheiss

Answer 1

1) Tax multiplier refers to the multiple by which GDP rises (falls) in response to a fall(rise) in taxes charged by governments. Thus an increase in tax (?T) results to a decrease in income (?Y); and the ratio of ?Y/?T, called the tax multiplier. There are two versions of the tax multiplier namely - the simple tax multiplier and the complex tax, and it depend on whether the tax change affects only the consumption component of GDP or it affects all the GDP components.

2) Balanced budget multiplier refers to a change in aggregate demand due to a change in government expenditure that is exactly matched by a change in revenues that it receives from taxation and several other sources. The change in government expenditure has an immediate effect on aggregate demand and generates equivalent size income. On contrary the change in taxation will not change aggregate demand by an equivalent amount as certain the increased/reduced disposable income will be offset by changes in savings

3) Pigou effect refers to the stimulation of output and employment caused by increasing consumption because of an increase in real balances of wealth, particularly during deflation. Thus the Pigou effect states that during the deflation of prices, employment (and hence output) will be increased because of an increase in wealth (and hence consumption).

4) A stabilization policy refers to a strategy of macroeconomic enacted by governments and central banks to keep economic growth stable, along with unemployment and price levels. Ongoing stabilization policy is inclusive of monitoring the business cycle and adjusting benchmark interest rates for controlling of aggregate demand in the economy; thus refer to policies in two distinct sets of circumstances: economic crisis stabilization and business cycle stabilization.

5) Expenditure Hypothesis is focused on the pattern of public expenditure and states that public expenditure would not follow a continuous or smooth trend however the increase in public expenditure takes place in steps or jerks. They gave three separate concepts to justify the hypothesis namely- Inspection effect, Displacement Effect and Concentration Effect