"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

Table 3.1
A. Effects of Government Expenditure and Financing on Private Saving and Capital Formation (Full Employment—All variables measured in real terms)
Private
Disposable. Consumption, capital
Government Income, C. Saving Deficit, formation
Income, Expenditure, Taxes, Y. (c 0 + cY) S =DW D. I =Dk
X. G. T. (X - T) (c = 0.6) (Y - C) (G - T) (S - D)
Method of Financing. (1) (2) (3) (4) (5) (6) (7) (8)
(a) Initial situation 2,000 300 300 1,700 1,500 200 0 200
(G 0 ) (C 0 ) (S 0 ) (S 0 )
(b) Increased expenditure–deficit 2,000 400 300 1,700 1,500 200 100 100
financed (G 0 + dG) (C 0 ) (S 0 ) (dG) (S 0 - dG)
(c) Increased expenditure—tax 2,000 400 400 1,600 1,440 160 0 160
financed (G 0 + dG) (C 0 - cdG) (S 0 - sdG) (S 0 - sdG)
B. Comparative “Burden” Effects of Alternative Budgetary Policies
Budgetary policy. Private capital formation. Effect on “Burden.”
1. Joint effect of increased expenditure and deficit financing I(b) - I(a) 1 = (S 0 - dG) - S 0 =-dG r*(dG)
2. Joint effect of increased expenditure and taxes I(c) - I(a) = (S 0 - sdG) - S 0 =-sdG r*s(dG)
3. Differential effect of deficit financing I(b) - I(c) = (S 0 - dG) - (S 0 - dG) = -(1 - s)dG =-cdG r*c(dG)
1 I(a) means investment in situation (a), and similarly for I(b) and I(c).
Long-Run Implications of Alternative Fiscal Policies 87