Macroecon chapter 7 Flashcards
Tax revenue function
T = tax rate(t) x GDP(Y)
Disposable income function relation to tax revenue function
Yd = Y - T
Yd = Y - tY = (1 - t)Y
Fiscal policy
Use of government tax and spending policies to achieve government objectives
Government budget balance
Difference between government revenue and expenditures (T - G)
If budget balance = 0…
Budget balanced
If budget balance < 0
Decifit
If budget balance > 0
Surplus
Equivalence to import (iM)
Marginal propensity to import (mY)
Net export formula (NX)
NX = (X - iM)
What kind of curve is the NX curve
Down sloping curve
Factors influencing NX curve
- Foreign income (yf)
- International relative price (Pd/Pf)
Foreign income’s impact on net export
Positive (since its impact is positive on export)
Change in foreign income on graph
Increase: NX curve shifts up
Decrease: NX curve shifts down
Relative price impact on net export
Negative
Relative price impact on import
Positive
Change in international relative prices on graph
Increase: X/NX curve shift downward, iM curve rotates up
Decrease: X/NX curve shift upward, iM curve shift downward
In the end, the NX curve shifts and rotates
Key factor influencing relative price (Pd/Pf)
Exchange rate
Exchange rate impact on relative price
Negative => depreciation
AE function (Y*)
AE = C + I + G + NX
Autonomous component of AE (A0)
A0 = C0 + I0 + G0 + X0
Induced component of AE (z)
z = [mpc (1-t) - m]
Simple multiplier function
1 / (1 - z) or ΔY / ΔA0
Fiscal policy impact on Y*
AE curve upward: G↑
AE curve downward: G↓
AE curve rotates upward: t↓
AE curve rotates downward: t↑
Types of fiscal policy (2)
- Contractional
- Expansionary
Factor influencing the simple multiplier
- Tax rate
- import
- mpc
Import impact on simple multiplier
Negative
MPC impact on simple multiplier
Positive
Tax rate impact on simple multiplier
Negative
