Economics chap 18

Question 1

Government spending(G)

Answer 1

A political issue
G is autonomous with respect to Y
G increases A
G does not affect the multiplier and slope, it increases the equilibrium level of income ceteris paribus
Is an injection
Direct effect

Question 2

Taxes(T)

Answer 2

If government wishes to spend, it should levy taxes
A leakage or withdrawal from the circular flow
T reduces the disposable income of households hence indirectly reducing the consumption spending of households
Indirect effect
PIT and VAT
Swivels the consumption function downward

Question 3

Direct vs Indirect taxes

Answer 3

Direct-as income increases, T increases
Indirect-on spending(VAT)

Question 4

Tax rate

Answer 4

Taxes are a certain proportion of income

Question 5

The introduction of a proportional tax thus

Answer 5

Leaves autonomous spending unchanged
Reduces multiplier
Reduces the level of income

Question 6

All that changes when the government is introduced is that:

Answer 6

Autonomous spending has an addition G
The multiplier becomes small

Question 7

Fiscal policy

Answer 7

Refers to the use of government spending (G) and taxes (T) to affect important macroeconomic variables such as aggregate production or income (Y)

Question 8

Close the income gap

Answer 8

In other words, the increase in government spending must be equal to the income gap that has to be closed, divided by the multiplier

Question 9

Why is Y>G

Answer 9

The increase in income is greater than the increase in
government spending, because of the effect of the multiplier

Question 10

Exports and Imports

Answer 10

Country’s link to to the rest of the world is important for its growth and stability
Exports inject into the circular flow
Imports is a withdrawal from the circular flow of income

Question 11

Exports(X)

Answer 11

An injection like G
Depends largely on the economic conditions in the rest of the world, international competitiveness and exchange rate
Autonomous with respect to Y
x increases A hence it is added to A
Does not change A and does not affect the multiplier

Question 12

The demand for South Africa’s exports

Answer 12

The demand for South Africa’s exports thus depends
largely on economic conditions in the rest of the world, our
international competitiveness, and exchange rates

Question 13

Imports(Z)

Answer 13

We expect Z to have the same effect as other leakages or withdrawals like T or Savings

Question 14

Case 1:Z is autonomous with respect with to Y

Answer 14

The most important fact about imports is that they represent a leakage or withdrawal from the circular flow of income and spending. In other words, when households, firms and the government spend on imported goods and services, they reduce aggregate spending on domestically produced goods and
services
Hence why it is subtracted from Aggregate spending
A = C + I + G + X – Z

Question 15

Case 2:Induced import

Answer 15

Imports reduce aggregate spending A, and therefore also total income Y, ceteris paribus
The leakages from the circular flow of income and spending increase as income increases. A smaller portion of any increase in income is therefore passed on in each round of the multiplier process, that is, the multiplier becomes smaller
As emphasized earlier, the equilibrium level of
income is always equal to the multiplier multiplied by the autonomous components of aggregate
spending, that is, Y0 = aA.

Question 16

Marginal propensity income(m)

Answer 16

Determines what percentage of an increase in Y is spent on imported goods
A larger m will therefore result in a smaller a