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If this table is graphed, it will look very much like the graph of the simpler model. The only difference will be that the consumption line will be lower. Increases or decreases in taxes will change the relationship between expected income and consumption.
The addition of government spending and taxes gives government a role in determining the level of national income. When government increases its spending by $1.00, income rises by more than a dollar in this model because of the multiplier effect. When government increases taxes, expected disposable income decreases, and people reduce consumption. Through the multiplier process, national income falls by a multiple of the change in taxes. The use of changes in government spending or taxing with the goal of changing national income is called fiscal policy.
The multipliers for government spending and for taxes are not the same and the table above can help illustrate why they are not. As it stands, the equilibrium level of income is $22,500, which results when expected disposable income is $20,000. Suppose taxes are reduced to zero. What will happen to equilibrium income? The tax column becomes zero and expected disposable income would then equal expected income. We can then ignore the first two columns of the table and relabel the third column as expected income. Clearly the new equilibrium income will be $30,000. Thus a reduction of taxes of $2500 increases income by $7500 (from $22,500 to $30,000), or each dollar of tax reduction increases actual income by 3.
Suppose instead that government spending increased by $2500. Then the sixth column would have the value of $4500, and actual income would be larger in each row. In particular, in the fourth row, actual income would increase to $32,500. However, expected income in the fourth row is $32,500, so this row contains the new equilibrium values. Hence an increase in government spending of $2500 increases actual income by $10,000 (from $22,500 to $32,500), or each dollar of increased government spending increases actual income by 4.
Changes in government spending and taxes both have the same effects on consumption in this table. Each dollar increase in government spending increases consumption spending by three as does each dollar decrease in taxes. The reason that they have different multiplier effects is that the change in government spending not only induces a change in consumption but also gets counted in spending, whereas the change in taxes does not get counted.
Having constructed the basic model, we next view it from some different perspectives.