Chapter 22 Flashcards
What is fiscal policy?
The use of the government’s tax and spending policies to achieve government objectives
What is T = ty?
Simple form for government net tax revenues. t = net tax rate
What is the net tax rate?
The increase in net tax revenue generated when national income increases by $1
What is a budget surplus vs budget deficit?
Budget surplus is when net revenues exceed purchases. Budget deficit is when purchases exceed net revenues.
True or false: the federal government accounts for more spending than the provincial and municipal combined
False, provincial and municipal account for more purchases than federal
What is the simple form for desired imports?
IM = mY, where m = marginal propensity to import
What is marginal propensity to import?
The increase in import expenditures induced by a $1 increase in national income
Net exports are described by what equation?
NX = X - mY
True or false: net exports are negatively related to national income
True. net exports fall as national income rises
What will change the slope of the NX function?
Anything affecting the proportion of income that consumers want to spend on imports
True or false: a rise in canadian prices relative to other countries reduces net exports at any level of income
true
When there are taxes, the ____ out of national income is _ than the ____ out of disposable income
marginal propensity to consume, less, marginal propensity to consume
What is the AE function expressed in terms of national income?
AE = [c + I + G + X] + [MPC(1-t)-m]Y
What is the simple multiplier with government included?
1/1-[MPC(1-t)-m]
The _ is the marginal propensity to import, the _ is the simple multiplier. The _ is the net tax rate, the _ is the simple multiplier.
higher, lower.
higher, lower.
what is a stabilization policy
Any policy designed to reduce the economy’s cyclical fluctuations and thereby stabilize national income
When T-G is positive there is a budget _
surplus
When T-G is negative, there is a budget _
deficit
A reduction in the net tax rate changes equilibrium income by __________ the AE curve, resulting in a(n) __________ slope.
rotating; steeper
because the lower net tax rate withdraws a smaller amount of national income from the desired consumption flow.
When incomes rise faster in Canada than in other countries:
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.
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 __________.
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
The simple multiplier is raised when the marginal propensity to import is:
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.
The simple multiplier is __________ when government and foreign trade are included, and the AE curve is __________.
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.
If output is demand determined, when firms __________ their output, they __________ a higher price for their product.
increase; do not require
A depreciation of the Canadian dollar causes the net export (NX) function to:
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.
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
Output may be demand determined if:
there are unemployed resources and firms have excess capacity
An increase in government purchases:
shifts the AE curve upward and tends to raise equilibrium national income
An increase in domestic prices relative to foreign prices will cause the marginal propensity to import (m) to __________ and the IM curve to __________.
rise; rotate up
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:
c + I + G + X
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:
The marginal propensity to spend out of national income = MPC(1 – t) – m = 0.71.
