7.1 Introducing Government

Question 1

What is Fiscal Policy?

Answer 1

Fiscal policy

      The use of the government’s tax and spending powers to achieve government objectives.

Question 2

What assumption do we make about government purchases, G, with respect to the level of national income?

Answer 2

In our macro model we make the simple assumption that the level of government purchases, G, is autonomous with respect to the level of national income. That is, we assume that G does not automatically change just because GDP changes. We then view any change in G as a result of a government policy decision.

Question 3

What are taxes effect on disposable income?

Answer 3

Taxes reduce disposable income relative to national income (GDP).

Question 4

how do transfer payments affect disposable income?

Answer 4

transfer payments raise disposable income relative to national income.

Question 5

In relation to taxes and transfer payments, how do we calculate the effect of government policy on desired consumption expenditure?

Answer 5

For the purpose of calculating the effect of government policy on desired consumption expenditure, it is the net effect of the two that matters.

Question 6

What is Net tax revenue?

Answer 6

Net tax revenue

      Total tax revenue minus transfer payments, denoted T.

Question 7

Why is net tax revenue positive?

Answer 7

Because transfer payments are smaller than total tax revenues, net tax revenues are positive.

Question 8

In our macro model, what assumptions do we make about the relationship between net tax revenue and level of national income?

Answer 8

In our macro model, we assume that net tax revenues vary directly with the level of national income.

Question 9

What formula do we use for Government net tax revenues?

Answer 9

We will use the following simple form for government net tax revenues, T:

T=tY

where Y is GDP and t is the net tax rate—the increase in net tax revenue generated when GDP increases by $1.

Question 10

What is net tax rate?

Answer 10

Net tax rate

      The increase in net tax revenue generated when national income rises by one dollar.

Question 11

Is t the rate on one specific type of tax?

Answer 11

t is not the rate on one specific type of tax. It is the amount by which total government tax revenues (net of transfers) change when national income changes.

Question 12

How do government transfers and taxes affect the disposible income formula?

Answer 12

Question 13

In the presence of government taxes and transfers, there is an important distinction between…

Answer 13

In the presence of government taxes and transfers, there is an important distinction between national income, Y, and disposable income, Y_D

Question 14

What is the budget balance?

Answer 14

The budget balance is the difference between total government revenue and total government expenditure; it equals net tax revenue minus government purchases,

T - G

Question 15

What is a budget surplus?

Answer 15

Budget surplus

      Any excess of current revenue over current expenditure.

Question 16

What is abudget deficit?

Answer 16

When purchases exceed net revenues, the government has a budget deficit.

Question 17

What is a balanced budget?

Answer 17

When the two amounts are equal, the government has a balanced budget.

Question 18

What must the government do when it has a budget deficit?

Answer 18

When the government has a budget deficit, it must borrow the excess of spending over revenues. It does this by issuing additional government debt in the form of bonds or Treasury bills.

Question 19

What does the government do when it has a budget surplus?

Answer 19

When the government has a budget surplus, it uses the excess revenue to buy back its outstanding debt.

Question 20

What is an imporant distinction when considering the overall contribution of government purchases to desired aggregate expenditure?

Answer 20

When measuring the overall contribution of government purchases to desired aggregate expenditure, all levels of government must be included.

Question 21

How do we get the government budget balance?

Answer 21

Question 22

Answer 22

Question 23

The AE function that reflects government spending

Answer 23

Question 24

How will an increase in government spending of 5B will add…

Answer 24

An increase in spending by​ $5 billion will add directly to aggregate demand by this amount​ and, through the multiplier​ effect, lead to an eventual change in national income equal to​ $5 billion times the simple multiplier.

Question 25

Using the model from this​ chapter, explain the effect on GDP from a tax rebate equal in value to​ $5 billion.

A tax rebate equal in value to​ $5 billion will add

Answer 25

A reduction in personal income taxes of​ $5 billion will add directly to disposable​ income, only a fraction of which​ (determined by the​ MPC) will then be spent. So the initial direct increase in aggregate demand will be​ $5 billion times the MPC.

Question 26

What is the function for z, the marginal propensity to spend?

Answer 26

Question 27

Can you offer one reason why the minister of finance might choose to emphasize increases in government spending rather than tax reductions in a federal budget in an effort to increase national​ income?

The minister of finance might chose to emphasize increases in government spending in an effort to increase national income because

Answer 27

The eventual effect on national income​ (after the multiplier​ effect) will be smaller after a tax reduction than in the case of the increase in spending. This basic logic partly explains why the federal government emphasized increases in spending rather than tax reductions.

Question 28

How do you find t_0 with the given information?

Answer 28

Question 29

What is the interpretation of t1 and t0?

Answer 29

Question 30

When there is a consistant tax rate, does higher levels of government spending increase or decrease the level of national savings at each income level?

Answer 30

It makes it higher

Question 31

Example of what a budget balence graph looks like

Answer 31

Keep in mind that the level of government expenditure is going to be subtracted from the atonomous variable, now added.

Question 32

What direction does an increase in government expenditure shift the The Budget Balence Function?

Answer 32

Down.