Chapter 10

Question 1

Why does output fluctuate around its potential level?

Answer 1

In business cycle booms and recession, output rises and falls relative to the trend of potential output

Question 2

What is the marginal propensity to consume?

Answer 2

For every additional dollar of Y, the level of C increases by $

Question 3

Why are savings an increasing function of income?

Answer 3

Because the marginal propensity to save is positive

Question 4

The larger the marginal propensity to consume …

Answer 4

The higher the equilibrium level of output and the higher the level of autonomous spending

Question 5

What is the equation for investment?

Answer 5

equals private savings plus government budget balance minus the trade balance

Question 6

What is autonomous spending?

Answer 6

spending that occurs independent of output and income levels

Question 7

What is the multiplier?

Answer 7

the change in equilibrium income when autonomous spending increases by $1

Question 8

What two ways does the government affect the level of equilibrium output?

Answer 8

1. Government expenditure
2. Taces and transfers

Question 9

What is fiscal policy?

Answer 9

The government’s use of taxation and spending to influence the economy

Question 10

What three things can cause equilibrium income and output to be higher?

Answer 10

1. Higher marginal propensity to consume
2. Higher the autonomous spending
3. Lower the tax rate

Question 11

What does income tax do to the multiplier?

Answer 11

lower it

Question 12

What two effects does the government increasing transfers have?

Answer 12

1. Autonomous spending would increase
2. Parts of the increase in TR is saved

Question 13

What are unemployment benefits and example of?

Answer 13

unemployment benefits

Question 14

What is the Ricardian equivalence?

Answer 14

An economic theory that suggest that the method used to finance government spending is not important

Question 15

What must policy be to be effective? (the three Ts)

Answer 15

it must be timely, targeted, and temporary

Question 16

When was the largest budget deficit?

Answer 16

2020

Question 17

What is the government budget balance?

Answer 17

the difference between the government’s revenues and expenditures

Question 18

What effect does an increase in government spending have on the budget balance?

Answer 18

reduces the surplus but also increases income, increasing tax revenues

Question 19

How is the budget balance effected by an increase in tax rate?

Answer 19

it reduces the level of income in output, but still increases the tax rate which increases the budget balance

Question 20

What is the full-employment adjusted budget balance?

Answer 20

the difference between tax revenues at the full-employment level of income or potential output and government spending

Question 21

What happens to the budget balance in a recession?

Answer 21

Output is below its potential, causing the actual budget balance to below the full employment budget balance