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Macroeconomics > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

What is fiscal policy?

A

Fiscal policy is the use of the government’s tax and spending policies to achieve government objectives

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2
Q

What are desired government purchases a part of?

A

They are part of aggregate desired expenditures

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3
Q

What assumption do we make about the level of government purchases with respect to the level of national income within the simple macro model?

A

That the level of government purchases is autonomous with respect to the level of national income

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4
Q

What is net tax revenue?

A

Net tax revenue is the total tax revenue minus transfer payments, denoted T

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5
Q

What is the equation for Net tax revenue?

A

T = tY
Where Y is GDP and t is the net tax rate

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6
Q

What is net tax rate?

A

It is the increase in net tax revenue generated when national income rises by $1

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7
Q

What variable represents national income?

A

Y

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8
Q

What variable represents disposable income?

A

YD

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9
Q

What is the budget balance?

A

It is the difference between total government revenue and total government expenditure

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10
Q

What is the budget balance equal to?

A

It equals net tax revenue minus government purchases. T-G

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11
Q

What happens to the government’s budget when net revenues exceed purchases?

A

The government has a budget surplus

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12
Q

What happens to the government’s budget when purchases exceed net revenues?

A

The government has a budget deficit

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13
Q

What happens to the government’s budget when net revenues and government purchases are equal?

A

The government has a balanced budget

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14
Q

Is the relationship between net tax revenues and national income positive or negative?

A

They are positively related

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15
Q

Does T enter the AE function directly or indirectly and how does it enter the AE function?

A

T enters the AE function indirectly and does so through its effect on disposable income (YD) and consumption

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16
Q

What do exports depend on?

A

Exports depend on the spending decisions made by foreign households and firms that purchase Canadian products

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17
Q

Typically, exports will not change as a result of changes in ____, so we treat exports as autonomous expenditure

A

Canadian national income

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18
Q

What is marginal propensity to import (m)?

A

It is the increase in import expenditures induced by a $1 increase in national income

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19
Q

What is the equation for marginal propensity to import?

A

IM = mY

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20
Q

What equation represents Net exports?

A

NX = X - mY (or NX = X - IM)

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21
Q

Exports are autonomous with respect to ___ but imports are positively related to ___, so net exports are negatively related to national income.

A

Y
Y

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22
Q

How can we find the slope of the net export function?

A

We can find the slope of the net export function by finding the negative of the marginal propensity to import

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23
Q

What does an increase in foreign income (other things being equal) do to the quantity of Canadian goods?

A

It increases the quantity of Canadian goods demanded by foreign countries

24
Q

How does the exports (X) curve and the net exports (NX) curve shift when foreign income increases?

A

They both shift upward parallel to their initial positions

25
Q

How does a rise in Canadian prices (relative to other countries) affect Canadian exports?

A

It decreases Canadian exports

26
Q

How does a rise in Canadian prices (relative to other countries) affect the X curve?

A

It will make it shift downward

27
Q

How does a rise in Canadian prices (relative to other countries) affect imports received by Canada?

A

It will make imports from foreign countries become cheaper relative to the prices of Canadian-made goods

28
Q

How does a rise in Canadian prices (relative to other countries) affect the marginal propensity to import and the IM curve?

A

The marginal propensity to import will rise and the IM curve will rotate up

29
Q

How does a rise in Canadian prices (relative to other countries) affect Canadian net exports at any level of national income?

A

It reduces Canadian net exports at any level of national income

30
Q

How does a fall in Canadian prices (relative to other countries) affect net exports at any level of national income?

A

It increases net exports at any level of national income

31
Q

What is the most important case of a change in international relative prices?

A

A change in the exchange rate

32
Q

What does a depreciation of the Canadian dollar mean?

A

It means that foreigners must pay less of their money to buy one Canadian dollar and Canadian residents must pay more Canadian dollars for foreign currency

33
Q

What does an appreciation of the Canadian dollar mean?

A

It means that foreigners must pay more of their money to buy one Canadian dollar and Canadian residents must pay less Canadian dollars for foreign currency

34
Q

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

A

less

35
Q

What is the equation of the AE function?

A

AE = C + I + G + (X - IM)

36
Q

What is the slope of the AE function?

A

The marginal propensity to spend out of national income (z)

37
Q

What is the equation for z in the simple macro model?

A

z = MPC (1-t) - m

38
Q

When national income is less than equilibrium what happens to the desired expenditure?

A

Desired expenditure must either be frustrated or take the form of purchases of inventories of goods that were produced in the past

39
Q

What do firms do when their inventories are being depleted?

A

They increase production, which increases national income

40
Q

What occurs when national income is greater than its equilibrium amount?

A

The opposite of what occurs when national income is less than equilibrium

41
Q

What happens to output when national income is equal to desired aggregate expenditure?

A

There is no pressure for output to change

42
Q

How is the multiplier affected in the presence of imports and taxes?

A

The presence of imports and taxes reduces the marginal propensity to spend out of national income and reduces the value of the simple multiplier

43
Q

What happens to the AE function when the net export function shifts upward?

A

The AE function will also shift upward and the equilibrium national income will rise

44
Q

What happens to the AE function when the net export function shifts downward?

A

The AE function will also shift downward and the equilibrium national income will fall

45
Q

Exports are ___ with respect to domestic national income

A

autonomous

46
Q

If exports increase by $1, then the equilibrium national income will increase/decrease by ___ times the simple multiplier

A

increase
$1

47
Q

What is the stabilization policy designed to do?

A

It is a policy that is designed to reduce the economy’s cyclical fluctuations and stabilize national income

48
Q

What are the two fiscal policy tools available to government policy makers?

A

The net tax rate (t)
Government purchases (G)

49
Q

A(n) increase/decrease in the net tax rate or a(n) increase/decrease in government purchases shifts the AE curve upward, setting in motion the multiplier process that tends to increase/decrease equilibrium national income

A

increase
increase
increase

50
Q

What is the equilibrium level of national income?

A

It is the level at which desired aggregate expenditures equals to actual national income (AE = Y)

51
Q

What do firms do when national income exceeds desired expenditure that causes national income to fall?

A

They eventually reduce production

52
Q

What do firms do when national income is less than desired expenditure that causes national income to rise?

A

They eventually increase production

53
Q

What does the simple multiplier measure that results from a change in what?

A

It measures the change in equilibrium national income that results from a change in the autonomous part of desired aggregate expenditure

54
Q

What is the simple multiplier equal to and what does z represent in this equation?

A

1/(1-z)
z is the marginal propensity to spend out of national income

55
Q

What is z equal to in a closed economy with no government?

A

It is equal to MPC (z=MPC)

Macroeconomics (14 decks)

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