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Week 7 · Lecture outline

Week 7 — Lecture Outline · Fiscal Policy: Spending, Taxes, the Multiplier & the Deficit vs. the Debt

Principles of Macroeconomics · ECON 2 Fall 2026 · Prof. Ashford Fictional sample

Course: Principles of Macroeconomics (ECON 2) · Silver Oak University (fictional sample) · Prof. Ashford
Objective 6 — fiscal policy; the spending multiplier; deficits & debt · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ~150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified (see the verified box in §4).

Week at a glance
Big question When the government changes how much it spends or taxes, how much does that ripple through the whole economy — and what's the honest case on both sides of "stimulus vs. austerity"?
By week's end students can (1) distinguish expansionary from contractionary fiscal policy; (2) apply the spending multiplier 1/(1−MPC) to compute a change in output from a change in government spending; (3) state the one-line tax-multiplier nod; (4) explain automatic stabilizers; (5) distinguish a deficit (flow) from the debt (stock); (6) present the Keynesian and the crowding-out/classical cases on fiscal policy fairly, keeping positive and normative separate.
Key vocabulary fiscal policy, expansionary vs. contractionary, government spending (G), taxes (T), marginal propensity to consume (MPC), marginal propensity to save (MPS), the spending multiplier 1/(1−MPC), the tax multiplier, automatic stabilizers, discretionary fiscal policy, budget deficit (flow), national debt (stock), crowding out
Materials whiteboard; the Week-7 readings/links; a spreadsheet or calculator for the multiplier rounds; an approved chatbot
Timing note 8 segments ≈ 150 min across two sessions. Trim Segment 7 (interaction) if short on time.

Segment 1 — HOOK: "Does spending $20 billion really move the whole economy?" (12 min)

Open with a claim from the news: "Congress just passed a $20 billion infrastructure package. Economists say it could add $100 billion to the economy." Ask the room: "How does $20 billion turn into $100 billion? Did the government find $80 billion lying around?" Let a few guesses land — someone may say "it must create jobs," someone may be skeptical it's real at all.

Reframe: that $80 billion "extra" isn't magic and it isn't free — it's the ripple effect of one round of spending becoming someone else's income, which becomes their spending, which becomes someone else's income again. That ripple has a name — the spending multiplier — and today you'll compute it exactly, round by round, and also meet the honest skeptics who worry the ripple isn't as clean as the simple story suggests.

Draw the line for today: fiscal policy is the government's own toolkit — spending (G) and taxes (T) — used to try to nudge the whole economy, distinct from the monetary policy toolkit (the Fed's interest-rate and money-supply tools) we'll cover starting Week 9. Fiscal = Congress and the President; monetary = the Federal Reserve. Don't mix them up — it's one of the most common mix-ups in the whole course.

Segment 2 — PLAIN-LANGUAGE IDEA: expansionary vs. contractionary, and why fiscal policy exists (18 min)

Teach it in one sentence first, then formalize:

Fiscal policy = using government spending and taxes on purpose to push the economy toward full employment and stable prices — expansionary to fight a recessionary gap, contractionary to fight an inflationary gap.

Connect directly to last week's gaps (Week 6): if the economy is sitting in a recessionary gap (Y below potential, like the 950-vs.-1000 example), the textbook Keynesian prescription is expansionary fiscal policy — increase G and/or decrease T — to push AD to the right and close the gap. If the economy is running an inflationary gap (Y above potential, like 1040-vs.-1000), the prescription flips: contractionary fiscal policy — decrease G and/or increase T — to pull AD back to the left.

Memory hook: "Expansionary = government presses the gas (more G, less T); contractionary = government taps the brake (less G, more T)." Both directions use the same two levers — spending and taxes — just pointed opposite ways.

Name the debate up front (evenhandedly), so students know it's coming all week: economists broadly agree on the mechanics just described — this is how the tools are supposed to work in the simple model. Where they disagree, sometimes sharply, is on how well fiscal policy works in the real world, how big the ripple really is, and what it costs — that's Segment 5 and this week's Discussion.

Segment 3 — WORKED EXAMPLE #1: the spending multiplier, digit by digit (22 min)

Set it up on the board and do every step out loud.

The core formula:

Spending multiplier = 1 / (1 − MPC)

where MPC (marginal propensity to consume) is the fraction of each extra dollar of income a household spends rather than saves. (The leftover fraction, MPS = 1 − MPC, is the marginal propensity to save.)

Walk the arithmetic slowly:

  • Suppose MPC = 0.8 (households spend 80 cents of every extra dollar, save 20 cents).
  • Multiplier = 1 / (1 − 0.8) = 1 / 0.2 = 5.
  • Now suppose the government increases spending by ΔG = $20 billion (say, on a road project).
  • ΔY = multiplier × ΔG = 5 × 20 = $100 billion.

Say it in words (this is the SLO-A habit): "A one-time $20 billion government purchase ends up adding $100 billion to total output — not because $80 billion appeared from nowhere, but because that $20 billion becomes someone's income, 80% of which gets spent again, becoming someone else's income, and so on, round after round, until the rounds shrink to nearly nothing." (The full round-by-round trace is this week's Workshop — don't do it here, just name that it's coming.)

Show three more MPC values so the formula's shape is clear (state, don't derive live):
- MPC 0.75 → multiplier = 1/(1−0.75) = 1/0.25 = 4
- MPC 0.9 → multiplier = 1/(1−0.9) = 1/0.10 = 10
- MPC 0.6 → multiplier = 1/(1−0.6) = 1/0.40 = 2.5

Name the pattern out loud: the closer MPC is to 1 (the more of each extra dollar people spend), the BIGGER the multiplier — because less leaks out to saving at each round. Misconception to kill right here: this is not the same formula as the money multiplier (1/RR, coming in Week 9) — same shape (1 over something), completely different economics. Watch for students who reach for "1/RR" on a fiscal-policy question; that is the classic mix-up.

One-line tax-multiplier nod (do not derive; just state and connect): cutting taxes also stimulates spending, but a tax cut is a little "weaker" dollar-for-dollar than a spending increase, because part of a tax cut gets saved before it ever enters the spending stream. The formula is tax multiplier = −MPC/(1−MPC); at MPC = 0.8 that's −4 — so a $25 billion tax cut → ΔY = −4 × (−25) = +$100 billion, the same total effect as the $20 billion spending example above, from a different-sized tax change, because the tax multiplier is smaller in magnitude than the spending multiplier. State this once, clearly, and move on — the full derivation is out of scope at the principles level.

Segment 4 — WORKED EXAMPLE #2: automatic stabilizers, and deficit vs. debt (25 min)

Automatic stabilizers — fiscal policy that doesn't wait for a vote. Some parts of the government's budget expand and contract automatically as the economy moves, with no new law needed: in a downturn, tax revenue automatically falls (people earn less, so they owe less) and transfer payments like unemployment insurance automatically rise (more people qualify) — both push in the expansionary direction exactly when the economy needs it, with zero lag for Congress to act. In a boom, the reverse happens automatically — rising incomes mean more tax revenue collected and fewer unemployment claims paid, which acts as a natural brake. Contrast explicitly with discretionary fiscal policy — a law Congress has to actively pass, like the $20 billion project above.

Now the second core distinction of the week — deficit (flow) vs. debt (stock):

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

  • The fictional nation of Meadowland collects revenue = $400 billion and spends $450 billion in one fiscal year.
  • Budget deficit = spending − revenue = 450 − 400 = $50 billion. This deficit is a flow — it's measured per year, like a paycheck.
  • Suppose Meadowland started the year owing $1,000 billion in accumulated past borrowing (its national debt).
  • After this year's $50 billion deficit is borrowed to cover the gap, the debt = 1,000 + 50 = $1,050 billion. The debt is a stock — it's the running total at a point in time, like a bank balance.

Read it out loud (the analogy that sticks): "A deficit is like spending more than you earned THIS MONTH — a flow. The debt is your credit-card BALANCE — everything you've ever borrowed and haven't paid back yet — a stock." A government can run a deficit every single year and the debt just keeps climbing (as Meadowland's did, 1,000 → 1,050); a government running a surplus (revenue > spending) could instead pay some debt down.

Name crowding out — fairly, not as a settled verdict: when the government borrows to cover a deficit, it competes with private borrowers for the same pool of loanable funds. One argument (a real concern many economists raise): this extra government borrowing can push up interest rates and "crowd out" some private investment that would otherwise have happened — partially offsetting the multiplier's stimulus. The other side (a real response many Keynesian-leaning economists raise): in a deep recession with idle resources and slack loanable-funds markets, crowding out may be small or negligible, because the government is putting unused resources to work rather than competing for scarce ones. Present both as live, reasonable positions — this is not settled, and neither side is "the economics answer."

Segment 5 — THE CONTESTED QUESTION: Keynesian case vs. classical/monetarist case (18 min)

This is the week's evenhandedness centerpiece — give it real time, and present both sides at full strength, explicitly separating positive (what a model predicts) from normative (what we should do).

The Keynesian multiplier case for using fiscal policy in a recession: when the economy sits in a recessionary gap with idle labor and capital (last week's interior-PPF-point/unemployment picture), a well-timed increase in G (or cut in T) can close the gap through the multiplier mechanism just worked above — putting idle resources back to work rather than competing for scarce ones, with limited crowding out when so much capacity is unused.

The classical/monetarist case for caution: (1) crowding out may bite even in a slack economy if the borrowing is large enough or persistent; (2) lags — it takes time to recognize a recession, more time to pass a law, and still more time for the spending to actually happen, so the "stimulus" can easily arrive after the economy has already turned around on its own, at which point it may add unwanted inflationary pressure instead of help; (3) a growing debt (Segment 4) has to be serviced (interest paid) and eventually addressed, which some economists argue constrains future budgets or future generations; (4) automatic stabilizers already do much of this work with no lag at all, raising the question of how much additional discretionary stimulus is really needed.

Keep positive and normative explicit: "the multiplier is 5 at MPC = 0.8" is a positive, testable mathematical claim inside the model. "Congress should pass a $20 billion stimulus package right now" is a normative judgment that depends on values (how much do we weigh helping today's unemployed vs. tomorrow's debt burden?) and on genuinely disputed empirical questions (how big is the real-world multiplier, how bad are the lags, how much crowding out actually occurs). No verdict from the instructor — both cases stand on their own merits.

Segment 6 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (18 min)

Live demo (spreadsheet): set up three columns — Round, New spending this round, Running total — and trace ΔG = $20 billion at MPC = 0.8 for a few rounds: Round 1 = 20, Round 2 = 20 × 0.8 = 16, Round 3 = 16 × 0.8 = 12.8, … Show that the running total climbs toward $100 billion as the rounds shrink toward zero. (The full table is the Workshop — this is just a live preview.)

AI-critique moment (do this with the class): Ask an approved chatbot: "If the government increases spending by $20 billion and the MPC is 0.8, what is the total change in GDP? Also, is this the same formula as the money multiplier?" Then audit it together: the right answer is ΔY = $100 billion (multiplier 5 × $20B), and NO — this is NOT the same formula as the money multiplier (1/RR, a completely different concept about bank reserves, coming Week 9). Chatbots frequently confuse the two multipliers, plug MPC into 1/RR by mistake, or forget to multiply by ΔG and just report the multiplier value alone. Make the class catch the error and state the correct reasoning. The habit all term: the tool drafts, you judge.

Segment 7 — INTERACTION: mini-debate (12 min)

Split the room into two sides (assign, don't let students self-select by prior belief — that keeps the exercise about the arguments, not the person). Side A argues the Keynesian case: the economy is in a recessionary gap; pass the $20 billion package. Side B argues the classical/monetarist case: lags mean it'll arrive too late, and the debt is already growing. Each side gets 2 minutes; no side is declared the "winner" — debrief by asking: "What would you need to know, in the real world, to decide which side has the better case THIS time?" (Answer: the size of the actual gap, how fast the spending can be deployed, the size of the real-world multiplier, and how much debt already exists — all empirical, contested questions, not settled by the model alone.)

Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (10 min)

  • Callback: every example today shared one engine — a dollar spent doesn't stay one dollar; it ripples through the economy round by round, and how big that ripple is (and whether triggering it on purpose is wise) is a genuinely contested question with strong arguments on more than one side.
  • Tease next week: "Next week is midterm review — we'll pull together everything from the macro perspective through fiscal policy: GDP, inflation, unemployment, growth, AD–AS, business-cycle gaps, and this week's multiplier, one map."
  • The week's work: Lecture Tutorial (expansionary/contractionary → the multiplier → automatic stabilizers → deficit vs. debt → the contested question), Practice (6 reps), Quiz 7, Discussion 7 ("Stimulus or Austerity in a Recession?"), Assignment 7, and Workshop 7 ("The Spending Multiplier" — trace the rounds and compare to 1/(1−MPC)).

Instructor FAQ — common stumbles

  • "Isn't the multiplier just free money?" No — the multiplier describes a ripple through existing spending and re-spending; it doesn't create resources out of nothing, and it can be partly offset by crowding out, taxes, and spending on imports (real-world "shrinkers" on the simple multiplier, named qualitatively).
  • "1/(1−MPC) or 1/RR — which multiplier is this?" 1/(1−MPC) is the SPENDING (fiscal) multiplier; 1/RR is the MONEY multiplier (Week 9, about bank reserves). Same "1 over something" shape, completely different mechanisms — don't let students merge them.
  • "Fiscal policy — is that the Fed?" No. Fiscal = Congress & the President (spending and taxes); monetary = the Federal Reserve (the money supply and interest rates, starting Week 9). One of the single most common mix-ups in the course — drill it every week it comes up.
  • "A deficit and the debt are basically the same thing, right?" No — deficit = one year's flow (this year's spending-minus-revenue gap); debt = the accumulated stock of every unpaid past deficit. A government can cut its deficit while its debt still grows (as long as the deficit is still positive, the debt keeps climbing, just more slowly).
  • "Is stimulus spending 'good' or 'bad'?" Trick framing for a genuinely contested question. The Keynesian case (close the gap, limited crowding out when resources are idle) and the classical/monetarist case (crowding out, lags, growing debt) are both live, reasonable positions among economists — this course teaches the arguments, not a verdict.
  • "Does a bigger multiplier always mean better policy?" Not automatically — a bigger multiplier (higher MPC) means a given ΔG produces a larger ΔY, but whether that's desirable depends on whether the economy actually needs the boost (a recessionary gap) or is already at/above potential (where more stimulus risks the inflationary-gap side of Week 6).

~ Prof. Ashford's edition · Fall 2026 · built with thecoursemaker.com