Chapter 22

Question 1

What is fiscal policy?

Answer 1

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

Question 2

What is T = ty?

Answer 2

Simple form for government net tax revenues. t = net tax rate

Question 3

What is the net tax rate?

Answer 3

The increase in net tax revenue generated when national income increases by $1

Question 4

What is a budget surplus vs budget deficit?

Answer 4

Budget surplus is when net revenues exceed purchases. Budget deficit is when purchases exceed net revenues.

Question 5

True or false: the federal government accounts for more spending than the provincial and municipal combined

Answer 5

False, provincial and municipal account for more purchases than federal

Question 6

What is the simple form for desired imports?

Answer 6

IM = mY, where m = marginal propensity to import

Question 7

What is marginal propensity to import?

Answer 7

The increase in import expenditures induced by a $1 increase in national income

Question 8

Net exports are described by what equation?

Answer 8

NX = X - mY

Question 9

True or false: net exports are negatively related to national income

Answer 9

True. net exports fall as national income rises

Question 10

What will change the slope of the NX function?

Answer 10

Anything affecting the proportion of income that consumers want to spend on imports

Question 11

True or false: a rise in canadian prices relative to other countries reduces net exports at any level of income

Answer 11

true

Question 12

When there are taxes, the ____ out of national income is _ than the ____ out of disposable income

Answer 12

marginal propensity to consume, less, marginal propensity to consume

Question 13

What is the AE function expressed in terms of national income?

Answer 13

AE = [c + I + G + X] + [MPC(1-t)-m]Y

Question 14

What is the simple multiplier with government included?

Answer 14

1/1-[MPC(1-t)-m]

Question 15

The _ is the marginal propensity to import, the _ is the simple multiplier. The _ is the net tax rate, the _ is the simple multiplier.

Answer 15

higher, lower.

higher, lower.

Question 16

what is a stabilization policy

Answer 16

Any policy designed to reduce the economy’s cyclical fluctuations and thereby stabilize national income

Question 17

When T-G is positive there is a budget _

Answer 17

surplus

Question 18

When T-G is negative, there is a budget _

Answer 18

deficit

Question 19

A reduction in the net tax rate changes equilibrium income by __________ the AE curve, resulting in a(n) __________ slope.

Answer 19

rotating; steeper

because the lower net tax rate withdraws a smaller amount of national income from the desired consumption flow.

Question 20

When incomes rise faster in Canada than in other countries:

Answer 20

Canadian net exports will fall
When Canadian incomes increase faster than other countries, Canada will import more foreign products and do so at a faster rate than Canadian exports increase. The net impact will be a decline in Canadian net exports.

Question 21

MPC = 0.75

t = 0.125

m = 0.1

The simple multiplier without government and foreign trade is __________.

The simple multiplier with government and foreign trade is __________.

Answer 21

The simple multiplier without government and foreign trade:

1 / (1 – MPC) = 1 / (1 – 0.75) = 1 / 0.25 = 4.00

The simple multiplier with government and foreign trade:

1 / (1 – [MPC(1 – t) – m]) = 1 / (1 – [0.75(1 – 0.125) – 0.1])

= 1 / (1 – 0.55625) = 1 / 0.44375 = 2.25

Question 22

The simple multiplier is raised when the marginal propensity to import is:

Answer 22

lowered
when m (the marginal propensity to import) decreases, the simple multiplier increases.
The lower the marginal propensity to import, the higher the simple multiplier.

Question 23

The simple multiplier is __________ when government and foreign trade are included, and the AE curve is __________.

Answer 23

smaller; flatter
Since some of any increase in national income goes to taxes and imports, the induced increase in desired expenditure on domestically produced goods is reduced. The resulting AE curve is flatter.

Question 24

If output is demand determined, when firms __________ their output, they __________ a higher price for their product.

Answer 24

increase; do not require

Question 25

A depreciation of the Canadian dollar causes the net export (NX) function to:

Answer 25

shift upward and become flatter
A depreciation of the Canadian dollar means that foreigners must pay less of their money to buy one Canadian dollar and that Canadian residents must pay more Canadian dollars to buy a unit of any foreign currency. As a result, the price of foreign goods in terms of Canadian dollars rises and the price of Canadian goods in terms of foreign currency falls. This reduction in the relative price of Canadian goods will cause a shift in expenditure away from foreign goods and toward Canadian goods. Canadian residents will import less at each level of Canadian national income, and foreigners will buy more Canadian exports. The net export (NX) function thus shifts upward and becomes flatter.

Question 26

In the presence of taxes, the marginal propensity to consume out of national income is ____________ the marginal propensity to consume out of disposable income.

Answer 26

less than

Question 27

Output may be demand determined if:

Answer 27

there are unemployed resources and firms have excess capacity

Question 28

An increase in government purchases:

Answer 28

shifts the AE curve upward and tends to raise equilibrium national income

Question 29

An increase in domestic prices relative to foreign prices will cause the marginal propensity to import (m) to __________ and the IM curve to __________.

Answer 29

rise; rotate up

Question 30

AE = C + I + G + (X – IM)

C = c + (MPC)(YD) = c + MPC(1 – t)Y = consumption

I = investment

G = government purchases

T = tY = net tax revenues

X = exports

IM = mY = imports

Then, autonomous expenditure equals:

Answer 30

c + I + G + X

Question 31

AE = C + I + G + (X – IM)

C = c + (MPC)(YD) = c + MPC(1 – t)Y = 45 + 0.9(1 – 0.10)Y = consumption

I = 70 = investment

G = 50 = government purchases

T = tY = 0.2Y = net tax revenues

X = 55 = exports

IM = mY = 0.1Y= imports

Given the above information, the marginal propensity to spend out of national income equals:

Answer 31

The marginal propensity to spend out of national income = MPC(1 – t) – m = 0.71.