CH7 - Government and Trade Flashcards
In our macro model, gov. purchases is _______ with respect to national income
autonomous
(G) does not include what?
Government transfer payments
What is the net tax revenue equation?
T = total tax revenue - transfer payments
What is the net tax rate
The increase in net tax revenue generated when GDP increase by $1
(t)
The net tax revenue enters the AE function _________ through its effect on what (2)?
indirectly
disposable income in the consumption function
What is it called when government purchases are larger than the net tax revenue?
Budget deficit
What is the budget balance?
The difference between total gov. revenue and total gov. expenditure
What is a fiscal policy?
The use of government’s tax and spending policies to attain government objectives
What are the 2 basic fiscal tools
Government spending
Taxation
Why would you choose to emphasize on government spending rather than taxation, when trying to increase national income?
Because the eventual effects on national income will be larger
What does a government issues when it’s running a budget deficit?
Additional bonds or Treasury Bills
What does the marginal propensity to import indicates?
The increase in imports when national income rises by $1
What is the net export function?
NX = X - mY
If Canadian prices rise compared to other countries, what happens to imports and to the NX function
Imports will rise
NX function shifts downward and becomes steeper
How is the net export function related to national income
It’s negatively related
The net export function is downward sloping because ?
The net export function (X - IM) falls as real national income increases
A major trading partner experiences a recession
1. What happens to the income of his country?
2. What happens to Canadian exports
3. What happens to the net export function?
- Income decreases
- Canadian exports decreases
- NX function shifts downward
With the addition of government and foreign trade to the simple macro model, the MPD out of national income is
_______
the MPC out of disposable income.
less than
Some national income is collected as what? And spent as what?
taxes and spent on imports
What is the multiplier with government and foreign trade?
1/ (1 - MPC*(1 - t) - m)
The value of the simple multiplier with gov. and trade is ______ than the one without it
Lower
What implies the assumption that prices level is constant ?
Firms are willing and able to produce any amount of output that is demanded without requiring any changes in prices
Is national income always at its equilibrium? Why
No because actual values are used when measuring national income and desired values are used for its determination.
Including government and trade, what is the new MPD equation?
MPD = MPC*(1 - t) - m
How do you find the equilibrium if the AE function is given? (no graph, only AE = a + bY)
You replace AE by Y so it looks like this: Y = a + bY
And then you isolate Y
When public saving is positive, what is the budget that the government run?
A budget surplus
What are Net Savings equations (2)
NS = Invest. - NX
or
NS = Private + Public Savings
What is the public saving equation?
Ps = T - G
Tax revenue - Gov expenditures
What is the private savings equation?
Spr = Y - T - C
Income - Tax - Consumption
What happens to the equilibrium national income if MPD gets smaller
It decreases
The value of the multiplier for an open economy with a government is ______ than for a closed one without government
smaller
An increase in the net tax rate _______ the value of the MPD and ________ the value of the simple multiplier
decrease
decrease
When does a recessionary gap occur?
When the current equilibrium national income is less than the potential national income
Written in this format: ( ) / ( ),
what is the national income equation
Y = A / (1 - MPD)
As the marginal propensity to import increases, what happens to the marginal propensity to spend?
It decreases, thus decreasing the multiplier
When the net tax rate increases, what happens to the MPD?
It decreases, thus decreasing the multiplier
In the aggregate expenditure model, the assumption of a constant price level implies what?
It implies that firms are able and willing to produce any amount of output that is demanded without requiring price changes
What can firms do when they have excess capacity?
They can respond to changes in demand by altering their production and sales
When can we expect national income to be demand-determined? (2)
1- When firms are price setters
2- When there are unemployed resources and firms have excess capacity
In the presence of taxes, the marginal propensity to consume out of national income is _______ the marginal propensity to consume out of disposable income
less than
What is the magnitude of stabilization policy so difficult to determine
The gap between actual and potential GDP is uncertain.
Output may be demand determined if? (2)
There are unemployed resources
Firms have excess capacity
Stabilization policy is used to __________ the economy’s cyclical fluctuations and thereby stabilize national income.
Reduce
The simple multiplier is __________ when government and foreign trade are included, and the AE curve is __________
smaller
flatter
A depreciation of the Canadian dollar causes the net export (NX) function to
shift upward and become flatter
The simple multiplier is lowered when the net tax rate is
raised
On what spending decisions do exports depend on?
Foreign households and firms
What is the most important change in international relatives prices?
A change in the exchange rate
What is the only case when there is no pressure for output to change?
When National income = desired aggregate expenditure
