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Flashcards in chapter 22 Deck (23)
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1
Q

fiscal policy

A
  • the use of governments tax and spending policies to achieve objectives
2
Q

government purchases

A
  • all levels of government purchases

- autonomous with respect to national income

3
Q

net tax revenue (T)

A
  • total tax revenue minus transfer payments

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

4
Q

T effect on Yd

A

Yd = Y - T

5
Q

tY

A
  • T = tY

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

6
Q

budget balance

A
  • (T - G)
  • budget surplus: T > G
  • budget deficit: T < G
7
Q

net exports

A
  • NX = (X - IM)
  • NX > 0, exports are greater than imports (trade surplus)
  • NX < 0, exports are less than exports (trade deficit)
8
Q

how are exports determined

A
  • level of GDP in other countries

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

9
Q

how imports are determined

A
  • depend on canadian GDP
  • if GDP/Y increases, imports increase
  • depends on the spending decisions of households and firms
10
Q

marginal propensity to import (m)

A
  • the increase in import expenditure induced by a $1 increase in national income
  • IM = mY
11
Q

net exports relation to national income

A
  • 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
12
Q

what causes a shift in net exports

A
  • changes in foreign income

- changes in international shipping prices

13
Q

changes in foreign income shift

A
  • increase in FI increases Qd of canadian goods

- X and NX shift up, parallel

14
Q

changes in international relative prices shift

A
  • 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
15
Q

if actual income (Y) is less than eqm output

A
  • households, government, firms, foreign demanders want to spend
  • want to purchase more goods than is being produced
  • inventories decrease
  • production increases
  • natioanl income increases
16
Q

when isnt there pressure for output to chang

A
  • when national income = desired AE
17
Q

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

A
  • depends on multiplier
18
Q

to reduce problems of potential GDP (YY*)

A
  • 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

19
Q

2 fiscla policy tools

A
  • net tax rate (t)
  • government purchases (G)
  • will shift AE up, sets multiplier process in motion - increases eqm national income
20
Q

change in G on eqm will

A
  • shift AE up

- ema income equals delta G x simple multiplier

21
Q

change in t on eqm

A
  • reduction in t rotates AE
  • curve has steeper slope
  • eqm income increases
22
Q

eqm national income

A
  • the level where desired AE = Y (desired aggregate expenditure = actual national income)
  • Y>AE, firms will reduce production, national income will fall
  • Y
23
Q

what determines national income

A
  • demand

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