MACRO-including the government and international trade

Question 1

What is the impact of taxes on MPC

Answer 1

they lower the marginal propensity to consume
out of national income. Households get only part of each extra pound of national
income to use as disposable income

Question 2

Does A higher tax rate always reduce aggregate demand and equilibrium output?

Answer 2

Not always, not if they spend a large amount of the tax revenue, as government spending on goods and services raises aggregate demand
and equilibrium output.

An equal initial increase in government spending and taxes raises aggregate
demand and output

Question 3

balanced budget multiplier

Answer 3

An equal initial increase in government spending and taxes raises aggregate
demand and output

Especially so, if taxes lower the marginal propensity to save, if consumers were going to save some of the money that was taxed away, the government spending this tax revenue is a boost to AD that wouldn’t of happened otherwise

Question 4

What happens to the following in equilibrium (in a closedd economy) desired saving ,taxes ,
investment government spending

Answer 4

desired saving= planned investment

taxes = gov spending (balanced budget)

Question 5

What is fiscal stance?

Answer 5

The impact that government spending and tax has on aggregate demand

Question 6

Automatic stabilizers

Answer 6

A process by which gov expenditure and revenue varies with the economic cycle , helping stabilise the economy without any active intervention from the gov

e.g. in a recession, gov expenditure rises as they’re paying more unemployment benefits, income tax revenues fall as less people are in work, this helps reduce the fall in aggregate demand.

Question 7

Discretionary (Active) fiscal policy

Answer 7

Discretionary fiscal policy means the government make changes to tax rates and or levels of government spending.

Question 8

expansionary fiscal policy

Answer 8

This involves the government seeking to increase aggregate demand – through higher government spending and/or lower tax.

Question 9

Deflationary fiscal policy

Answer 9

This involves the government seeking to lower aggregate demand – through lower government spending and/or higher tax.

Question 10

Are budget deficits always bad?

Answer 10

No, Deficits are not necessarily bad. Particularly in a recession, a move to cut the
deficit may lead output falling further away from potential output. However, huge deficits can
create a vicious cycle of extra borrowing, extra interest payments and yet more
borrowing

Question 11

MPZ

Answer 11

marginal propensity to import
The proportion of an additional pound of disposable income that consumers wish to spend on imports (leakage from the economy)

Question 12

trade surplus,

Answer 12

exports- imports is positive

Question 13

What is the equilibrium equation for leakages equaling injections?

Answer 13

S+ NetT+Z=I+G+X

Question 14

What is an exchange rate, the pound/ US dollar exchange rate

Answer 14

Is the price of the currency in terms of another, in this case, how many dollars one pound will buy you

Question 15

Why can a relative fall in domestic interest rates compared to abroad decrease the exchange rate for this country eg a fall in exchange rate of pound / US dollar

Answer 15

Low interest rates here compared to abroad encourages foreign investors to leave the UK and seek out a higher interest rate abroad.

Causing a fall in demand for the pound making the pound “weaker” (lowering the interest rate)

Question 16

name some factors that can encourage a countrys currency to appreciate

Answer 16

Speculation that the currency will become stronger (increase in speculative traders buying the currency)

Rise in domestic relative interest rates to abroad (encourages people to move savings and investments to this country)

Multinational companies moving to the country ( have to pay workers, buy capital in the countries currency)

Rise in income abroad, compared to domestically (their spending on our goods would then increase more than ours on their goods, ceteris paribus)

If the country exports become more competitive e.g. if better capital

These all cause demand to shift to the right, increasing exchange rate.