CH7 - Government and Trade

Question 1

In our macro model, gov. purchases is _______ with respect to national income

Answer 1

autonomous

Question 2

(G) does not include what?

Answer 2

Government transfer payments

Question 3

What is the net tax revenue equation?

Answer 3

T = total tax revenue - transfer payments

Question 4

What is the net tax rate

Answer 4

The increase in net tax revenue generated when GDP increase by $1
(t)

Question 5

The net tax revenue enters the AE function _________ through its effect on what (2)?

Answer 5

indirectly

disposable income in the consumption function

Question 6

What is it called when government purchases are larger than the net tax revenue?

Answer 6

Budget deficit

Question 7

What is the budget balance?

Answer 7

The difference between total gov. revenue and total gov. expenditure

Question 8

What is a fiscal policy?

Answer 8

The use of government’s tax and spending policies to attain government objectives

Question 9

What are the 2 basic fiscal tools

Answer 9

Government spending
Taxation

Question 10

Why would you choose to emphasize on government spending rather than taxation, when trying to increase national income?

Answer 10

Because the eventual effects on national income will be larger

Question 11

What does a government issues when it’s running a budget deficit?

Answer 11

Additional bonds or Treasury Bills

Question 12

What does the marginal propensity to import indicates?

Answer 12

The increase in imports when national income rises by $1

Question 13

What is the net export function?

Answer 13

NX = X - mY

Question 14

If Canadian prices rise compared to other countries, what happens to imports and to the NX function

Answer 14

Imports will rise

NX function shifts downward and becomes steeper

Question 15

How is the net export function related to national income

Answer 15

It’s negatively related

Question 16

The net export function is downward sloping because ?

Answer 16

The net export function (X - IM) falls as real national income increases

Question 17

A major trading partner experiences a recession
1. What happens to the income of his country?
2. What happens to Canadian exports
3. What happens to the net export function?

Answer 17

1. Income decreases
2. Canadian exports decreases
3. NX function shifts downward

Question 18

With the addition of government and foreign trade to the simple macro​ model, the MPD out of national income is
_______
the MPC out of disposable income.

Answer 18

less than

Question 19

Some national income is collected as what? And spent as what?

Answer 19

taxes and spent on imports

Question 20

What is the multiplier with government and foreign trade?

Answer 20

1/ (1 - MPC*(1 - t) - m)

Question 21

The value of the simple multiplier with gov. and trade is ______ than the one without it

Answer 21

Lower

Question 22

What implies the assumption that prices level is constant ?

Answer 22

Firms are willing and able to produce any amount of output that is demanded without requiring any changes in prices

Question 23

Is national income always at its equilibrium? Why

Answer 23

No because actual values are used when measuring national income and desired values are used for its determination.

Question 24

Including government and trade, what is the new MPD equation?

Answer 24

MPD = MPC*(1 - t) - m

Question 25

How do you find the equilibrium if the AE function is given? (no graph, only AE = a + bY)

Answer 25

You replace AE by Y so it looks like this: Y = a + bY And then you isolate Y

Question 26

When public saving is positive, what is the budget that the government run?

Answer 26

A budget surplus

Question 27

What are Net Savings equations (2)

Answer 27

NS = Invest. - NX or NS = Private + Public Savings

Question 28

What is the public saving equation?

Answer 28

Ps = T - G Tax revenue - Gov expenditures

Question 29

What is the private savings equation?

Answer 29

Spr = Y - T - C Income - Tax - Consumption

Question 30

What happens to the equilibrium national income if MPD gets smaller

Answer 30

It decreases

Question 31

The value of the multiplier for an open economy with a government is ______ than for a closed one without government

Answer 31

smaller

Question 32

An increase in the net tax rate _______ the value of the MPD and ________ the value of the simple multiplier

Answer 32

decrease decrease

Question 33

When does a recessionary gap occur?

Answer 33

When the current equilibrium national income is less than the potential national income

Question 34

Written in this format: ( ) / ( ), what is the national income equation

Answer 34

Y = A / (1 - MPD)

Question 35

As the marginal propensity to import increases, what happens to the marginal propensity to spend?

Answer 35

It decreases, thus decreasing the multiplier

Question 36

When the net tax rate increases, what happens to the MPD?

Answer 36

It decreases, thus decreasing the multiplier

Question 37

In the aggregate expenditure​ model, the assumption of a constant price level implies what?

Answer 37

It implies that firms are able and willing to produce any amount of output that is demanded without requiring price changes

Question 38

What can firms do when they have excess capacity?

Answer 38

They can respond to changes in demand by altering their production and sales

Question 39

When can we expect national income to be demand-determined? (2)

Answer 39

1- When firms are price setters 2- When there are unemployed resources and firms have excess capacity

Question 40

In the presence of taxes, the marginal propensity to consume out of national income is _______ the marginal propensity to consume out of disposable income

Answer 40

less than

Question 41

What is the magnitude of stabilization policy so difficult to determine

Answer 41

The gap between actual and potential GDP is uncertain.

Question 42

Output may be demand determined if? (2)

Answer 42

There are unemployed resources Firms have excess capacity

Question 43

Stabilization policy is used to __________ the economy’s cyclical fluctuations and thereby stabilize national income.

Answer 43

Reduce

Question 44

The simple multiplier is __________ when government and foreign trade are included, and the AE curve is __________

Answer 44

smaller flatter

Question 45

A depreciation of the Canadian dollar causes the net export (NX) function to

Answer 45

shift upward and become flatter

Question 46

The simple multiplier is lowered when the net tax rate is

Answer 46

raised

Question 47

On what spending decisions do exports depend on?

Answer 47

Foreign households and firms

Question 48

What is the most important change in international relatives prices?

Answer 48

A change in the exchange rate

Question 49

What is the only case when there is no pressure for output to change?

Answer 49

When National income = desired aggregate expenditure