Chapter 7 Flashcards
What is fiscal policy?
Fiscal policy is the use of the government’s tax and spending policies to achieve government objectives
What are desired government purchases a part of?
They are part of aggregate desired expenditures
What assumption do we make about the level of government purchases with respect to the level of national income within the simple macro model?
That the level of government purchases is autonomous with respect to the level of national income
What is net tax revenue?
Net tax revenue is the total tax revenue minus transfer payments, denoted T
What is the equation for Net tax revenue?
T = tY
Where Y is GDP and t is the net tax rate
What is net tax rate?
It is the increase in net tax revenue generated when national income rises by $1
What variable represents national income?
Y
What variable represents disposable income?
YD
What is the budget balance?
It is the difference between total government revenue and total government expenditure
What is the budget balance equal to?
It equals net tax revenue minus government purchases. T-G
What happens to the government’s budget when net revenues exceed purchases?
The government has a budget surplus
What happens to the government’s budget when purchases exceed net revenues?
The government has a budget deficit
What happens to the government’s budget when net revenues and government purchases are equal?
The government has a balanced budget
Is the relationship between net tax revenues and national income positive or negative?
They are positively related
Does T enter the AE function directly or indirectly and how does it enter the AE function?
T enters the AE function indirectly and does so through its effect on disposable income (YD) and consumption
What do exports depend on?
Exports depend on the spending decisions made by foreign households and firms that purchase Canadian products
Typically, exports will not change as a result of changes in ____, so we treat exports as autonomous expenditure
Canadian national income
What is marginal propensity to import (m)?
It is the increase in import expenditures induced by a $1 increase in national income
What is the equation for marginal propensity to import?
IM = mY
What equation represents Net exports?
NX = X - mY (or NX = X - IM)
Exports are autonomous with respect to ___ but imports are positively related to ___, so net exports are negatively related to national income.
Y
Y
How can we find the slope of the net export function?
We can find the slope of the net export function by finding the negative of the marginal propensity to import
What does an increase in foreign income (other things being equal) do to the quantity of Canadian goods?
It increases the quantity of Canadian goods demanded by foreign countries
How does the exports (X) curve and the net exports (NX) curve shift when foreign income increases?
They both shift upward parallel to their initial positions
How does a rise in Canadian prices (relative to other countries) affect Canadian exports?
It decreases Canadian exports
How does a rise in Canadian prices (relative to other countries) affect the X curve?
It will make it shift downward
How does a rise in Canadian prices (relative to other countries) affect imports received by Canada?
It will make imports from foreign countries become cheaper relative to the prices of Canadian-made goods
How does a rise in Canadian prices (relative to other countries) affect the marginal propensity to import and the IM curve?
The marginal propensity to import will rise and the IM curve will rotate up
How does a rise in Canadian prices (relative to other countries) affect Canadian net exports at any level of national income?
It reduces Canadian net exports at any level of national income
How does a fall in Canadian prices (relative to other countries) affect net exports at any level of national income?
It increases net exports at any level of national income
What is the most important case of a change in international relative prices?
A change in the exchange rate
What does a depreciation of the Canadian dollar mean?
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
What does an appreciation of the Canadian dollar mean?
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
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.
less
What is the equation of the AE function?
AE = C + I + G + (X - IM)
What is the slope of the AE function?
The marginal propensity to spend out of national income (z)
What is the equation for z in the simple macro model?
z = MPC (1-t) - m
When national income is less than equilibrium what happens to the desired expenditure?
Desired expenditure must either be frustrated or take the form of purchases of inventories of goods that were produced in the past
What do firms do when their inventories are being depleted?
They increase production, which increases national income
What occurs when national income is greater than its equilibrium amount?
The opposite of what occurs when national income is less than equilibrium
What happens to output when national income is equal to desired aggregate expenditure?
There is no pressure for output to change
How is the multiplier affected in the presence of imports and taxes?
The presence of imports and taxes reduces the marginal propensity to spend out of national income and reduces the value of the simple multiplier
What happens to the AE function when the net export function shifts upward?
The AE function will also shift upward and the equilibrium national income will rise
What happens to the AE function when the net export function shifts downward?
The AE function will also shift downward and the equilibrium national income will fall
Exports are ___ with respect to domestic national income
autonomous
If exports increase by $1, then the equilibrium national income will increase/decrease by ___ times the simple multiplier
increase
$1
What is the stabilization policy designed to do?
It is a policy that is designed to reduce the economy’s cyclical fluctuations and stabilize national income
What are the two fiscal policy tools available to government policy makers?
The net tax rate (t)
Government purchases (G)
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
increase
increase
increase
What is the equilibrium level of national income?
It is the level at which desired aggregate expenditures equals to actual national income (AE = Y)
What do firms do when national income exceeds desired expenditure that causes national income to fall?
They eventually reduce production
What do firms do when national income is less than desired expenditure that causes national income to rise?
They eventually increase production
What does the simple multiplier measure that results from a change in what?
It measures the change in equilibrium national income that results from a change in the autonomous part of desired aggregate expenditure
What is the simple multiplier equal to and what does z represent in this equation?
1/(1-z)
z is the marginal propensity to spend out of national income
What is z equal to in a closed economy with no government?
It is equal to MPC (z=MPC)
