00:01
So here we're talking about multipliers, but i should give you the basic answer up front.
00:06
A change in government spending has a bigger effect than a change in taxes.
00:18
And to see that, let's just set up a very simple economy.
00:23
So let's imagine that y is just c plus i plus g, and that c takes a particular functional form.
00:31
So this is what you would call your marginal propensity to consume, right? it says that out of your disposable income, how much do you spend? so plus i plus g.
00:44
And now let's imagine that the government increases spending by one.
00:49
Well, if the government increases spending by one, y is going to increase by one, right? because g is part of y.
00:57
But when y increases by one, you see that consumption is going to change, right? we increase, this is going to be my consumption term, right? this is my consumption function.
01:09
So the y going up by one implies that consumption is going to go up by the marginal propensity to consume, right? it is getting, people are becoming richer, income is rising, and so people spend more.
01:25
But consumption, so g affects y, y affects c, but now c affects y.
01:33
So we get, well, consumption going up by the marginal propensity to consume means that y is going up by the marginal propensity to consume.
01:42
And you see that this cycle is going to repeat, right? y going up by the marginal propensive to consume implies that c is going to go up by the marginal propensive to consume squared and so on and so on and so forth...