chapter 22

Question 1

fiscal policy

Answer 1

• the use of governments tax and spending policies to achieve objectives

Question 2

government purchases

Answer 2

• all levels of government purchases

- autonomous with respect to national income

Question 3

net tax revenue (T)

Answer 3

• total tax revenue minus transfer payments

- T will enter the AE function indirectly through its effect on disposable income (Yd) and consumption

Question 4

T effect on Yd

Answer 4

Yd = Y - T

Question 5

tY

Answer 5

• T = tY

- T is the net tax rate minus the increase in net tax revenue generated when national income rises by one dollar

Question 6

budget balance

Answer 6

• (T - G)
• budget surplus: T > G
• budget deficit: T < G

Question 7

net exports

Answer 7

• NX = (X - IM)
• NX > 0, exports are greater than imports (trade surplus)
• NX < 0, exports are less than exports (trade deficit)

Question 8

how are exports determined

Answer 8

• level of GDP in other countries

- independent of canadian output, treated as autonomous expenditure (not dependent on Y)

Question 9

how imports are determined

Answer 9

• depend on canadian GDP
• if GDP/Y increases, imports increase
• depends on the spending decisions of households and firms

Question 10

marginal propensity to import (m)

Answer 10

• the increase in import expenditure induced by a $1 increase in national income
• IM = mY

Question 11

net exports relation to national income

Answer 11

• together: NX = X - mY
• exports are autonomous with respect to Y
  0 imports are positively related to Y
• net exports are negatively related to national income

Question 12

what causes a shift in net exports

Answer 12

• changes in foreign income

- changes in international shipping prices

Question 13

changes in foreign income shift

Answer 13

• increase in FI increases Qd of canadian goods

- X and NX shift up, parallel

Question 14

changes in international relative prices shift

Answer 14

• rise in canadain prices decreases exports
• X shift down
• increase in imports bc foreign goods cheaper - marginal propensity will increase and IM shift up
• NC function shift down

Question 15

if actual income (Y) is less than eqm output

Answer 15

• households, government, firms, foreign demanders want to spend
• want to purchase more goods than is being produced
• inventories decrease
• production increases
• natioanl income increases

Question 16

when isnt there pressure for output to chang

Answer 16

• when national income = desired AE

Question 17

how much will AE curve shift with a change in autonomous spending

Answer 17

• depends on multiplier

Question 18

to reduce problems of potential GDP (YY*)

Answer 18

• tries to stabilize level of real GDP close to Y*

- any policy designed to reduced economy’s cyclical fluctuations and stabilize national income is fiscal

Question 19

2 fiscla policy tools

Answer 19

• net tax rate (t)
• government purchases (G)
• will shift AE up, sets multiplier process in motion - increases eqm national income

Question 20

change in G on eqm will

Answer 20

• shift AE up

- ema income equals delta G x simple multiplier

Question 21

change in t on eqm

Answer 21

• reduction in t rotates AE
• curve has steeper slope
• eqm income increases

Question 22

eqm national income

Answer 22

• the level where desired AE = Y (desired aggregate expenditure = actual national income)
• Y>AE, firms will reduce production, national income will fall
• Y

Question 23

what determines national income

Answer 23

• demand

- constructed for a given price level, is assumed to be constant