FDNECON 04 · Fiscal Policy and Output Gaps

−₱200bn; a recessionary gap motivates expansionary fiscal support.

Signed gap=actual−potential=4,800−5,000=−₱200bn. The source associates output below potential with recessionary conditions and expansionary measures. The gap is not automatically the required initial spending increase.

+4%, an inflationary gap in the course framework.

Gap percentage=(5,200−5,000)/5,000 ×100=4%. Actual exceeds the sustainable benchmark, so the lecture calls it inflationary. The level ratio 104% is different from the gap percentage.

Increase government purchases and reduce taxes.

Higher purchases add demand directly; lower taxes can raise disposable income and consumption. Reserve requirements and central-bank securities operations are monetary rather than fiscal levers.

Purchases directly buy output; some of the extra disposable income from tax cuts may be saved.

The initial channel differs: ΔG is a purchase, whereas a tax cut first changes disposable income. A stated spending propensity determines how much becomes consumption in the simple model.

It is a transfer; a later recipient purchase can enter C as a separate event.

Government purchases and redistribution of purchasing power are separate. Counting the transfer as G and a later goods purchase as C would misidentify what each event measures.

₱1,500.

Add only the four specified rounds: 800+400+200+100=₱1,500. ₱1,600 would be the infinite halving-series result if that extra assumption were supplied. ₱700 excludes the initial injection.

₱1,600.

The geometric multiplier is 1/(1−0.5)=2 under the explicit indefinite-chain assumption. Total=800×2=₱1,600. A finite four-round total would instead be ₱1,500.

The counted rounds must involve additional production/income under the stated assumptions, not mere asset transfers.

GDP counts production. The spending-chain model assumes purchases induce additional output; repeatedly exchanging an existing asset does not satisfy that production condition.

5.

The leakage per round is 1−0.8=0.2; k=1/0.2=5. This idealized multiplier assumes no other leakage, price change or offset and formalizes the source’s chain.

ΔY=+₱100bn; induced portion=₱75bn.

The multiplier total includes the initial spending: 4×25=₱100bn. Later induced rounds therefore total 100−25=₱75bn. Adding the initial ₱25bn again would double-count it.

+₱60 billion.

Required ΔG=target ΔY/k=180/3=+₱60bn. The gap is the target output response, while the initial spending is the target divided by the multiplier. Realized effects need not equal this idealized calculation.

Government borrowing raises demand for limited loanable funds → rates rise → private investment can fall.

Borrowing competes for available funds in the source mechanism. Higher financing costs may reduce private investment, partly offsetting the original demand support; the size of the offset is not guaranteed.

+₱50 billion.

Apply the signs in ΔY=ΔC+ΔI+ΔG+ΔNX: 0−20+70+0=+₱50bn. Adding the investment decline as a positive number would misread the offset.

The two levers exert opposing demand effects; their sizes and behavioral responses determine the net effect.

A spending rise adds direct demand, while a tax rise can reduce disposable income and consumption. Without relative sizes and response assumptions, the net direction is not established by one lever.

+₱60 billion.

The supplied tax multiplier is −0.75/0.25=−3. Multiply by the negative tax change: (−3)(−20)=+₱60bn. This is a fully stated practice extension, not a formula asserted to be on the source slide.

Improving long-run productivity through effective infrastructure and resource use.

The source includes growth, equity/human development and efficient resource use alongside stabilization. Productive investment can affect capacity over time, so fiscal evaluation includes more than current gap arithmetic.