Chapter 9: Models with Government

Question 1

Deficit

Answer 1

• Flow variable, when G > T (government spending is greater than taxes) = deficit
• Spending more than you have
  (Surplus is when G < T)

Question 2

Debt

Answer 2

Stock variable, the collection of deficits

Question 3

The government budget deficit is a blank variable but the government debt is a blank variable

Answer 3

Deficit is a flow variable (“F” for flow)

Debt is a stock variable

Question 4

In our model of the goods and services market with a government, a decrease in net taxes (T) will…

Answer 4

Shift the aggregate expenditure function upward (lower taxes increases consumption, people have more $ to spend)

Question 5

In our model of the goods and services market with a government, if the government wants to reduce unemployment, government purchases should be blank and/or taxes should be blank

Answer 5

If you want to reduce unemployment, government purchases should increase and taxes should decrease, expansionary policiy

Question 6

Government equation

Answer 6

G = G with line on top
G = Government expenditure
G with line on top = some number

Question 7

Government spending is decided by…

Answer 7

Congress (can’t create money, only the Federal Reserve can) taxes to get funding

Question 8

Net taxes equation

Answer 8

T = T with line on top
T = Net taxes
T with line on top = some number

Question 9

Fiscal policy values

Answer 9

T and G

Fiscal policy regulates the good and services model

Question 10

Aggregate Expenditure (with government)

Answer 10

A =- C + I + G
A = Aggregate expenditure
C = Consumption: a+b(Y-T)
I = Planned investment
G = Government expenditures
=- will always equal
Note: Consumption function changes with problems with a government

Question 11

Consumption equation (with government)

Answer 11

C = a+b(Y-T)
C = Consumption
a = autonomous consumption
b = marginal propensity to consume (MPC)
Y = Income/output
T = Net taxes

Question 12

Equilibrium Level of Output equation (with government)

Answer 12

Y = C + I + G
Y = Income/output
C = Consumption: a+b(Y-T)
I = Planned investment
G = Government expenditures

Question 13

Disposable Income equation

Answer 13

Yd = (Y - T)
Yd = Disposable income
Y = Income/output
T = Net taxes

Question 14

Balanced Budget

Answer 14

When G = T (when government spending equals taxes)

Question 15

Multiplier

Answer 15

Numbers that tell us how change in (T,I, or G) will affect income (Y)

Question 16

Private Investment Multiplier

Answer 16

change in Y = (1/1-b) * change in I
Change in I can be a positive amount 
   - Ex: I = 100 -> 200 change in I = 100
Change in I can be a negative amount 
   - Ex: I = 100 -> 50 change in I = -50

Question 17

Government Consumption Multiplier

Answer 17

change in Y = (1/1-b) * change in G

Question 18

Tax Multiplier

Answer 18

change in Y = (-b/1-b) * change in T

Note: Negative negative -b over 1-b

Question 19

Net Taxes

Answer 19

T = (Taxes - transfers)
T = Net taxes
Transfers = Flow of money from one segment of the country to another