ECON 110 Chapter Notes - Chapter 22: Disposable And Discretionary Income, Autonomous Consumption, Consumption Function

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Chapter 22: adding government and trade to the simple macro model. 22. 1 introducing government: fiscal policy is the use of the government"s tax and spending policies to achieve government objectives. Provincial and municipal governments: when measuring the overall contribution of government to desired aggregate expenditure, all level of government must be included, government includes federal, provincial, and municipal. Canadian goods demanded by foreign countries, which is an increase in. Canadian net exports at any level of national income. Desired consumption and national income: disposable income is equal to national income minus net taxes, yd = y - t, the relationship between consumption and national income in the presence of taxes, 1. Assume that the net tax rate (t) is 10 percent so net tax revenues are 10% of national income: t = (0. 1)y, 2. Disposable income must therefore be 90% of national income: yd = y - t = y - (0. 1)y = (0. 9)y, 3.

Related Questions

The Modified Keynesian Model

Y = C + I + G + X â IM â¦ equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI â¦ consumption function

I = 50 â¦ autonomous investment

G = 100 â¦ autonomous government spending

X = 200 â¦ autonomous exports

IM = 100 â¦ autonomous imports

And also:

DI = Y â T + Tr T = 0 â¦ autonomous taxes

Tr = 0 â¦ autonomous transfer payments

YF = 5000 â¦ full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? â¦ the value of the MPS?

5. Calculate the âoversimplifiedâ expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question â6â.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?

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1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

	a.	The aggregate demand curve will shift to the right.
	b.	The economy will always approach potential GDP.
	c.	The marginal propensity to consume will increase.
	d.	The average price level will increase.
	e.	The aggregate demand curve will shift to the left.

2. If the government wants to close a GDP gap, it can:

Answer

	a.	lower government spending on social security.
	b.	adopt contractionary fiscal policies to control inflation.
	c.	increase its budget deficit.
	d.	repay its borrowings.
	e.	raise both direct and indirect tax rates.

3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

	a.	lowering average tax rates such that aggregate supply is increased.
	b.	increasing government spending such that aggregate expenditures are increased.
	c.	increasing transfer payments such that aggregate expenditures decline.
	d.	raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
	e.	decreasing government spending such that aggregate demand is reduced.

4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

	a.	the multiplier effect.
	b.	crowding out.
	c.	an expansionary gap.
	d.	the paradox of thrift.
	e.	the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

	a.	the deliberate manipulation of the money supply to expand the economy.
	b.	the deliberate change in tax laws and government spending to change equilibrium income.
	c.	the policy action taken by the Congress to reduce the federal budget deficit.
	d.	the arbitrary fluctuation in tax laws and budget requirements.
	e.	the automatic change in certain fiscal instruments when real GDP changes.

6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

	a.	Money supply
	b.	Disposable income
	c.	Real exchange rate
	d.	Real interest rate
	e.	Unemployment insurance

7. Which of the following is true about automatic stabilizers?

Answer

	a.	When income rises, automatic stabilizers increase/boost spending.
	b.	Automatic stabilizers are a part of discretionary fiscal policy.
	c.	An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
	d.	Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
	e.	The interest rate is an example of an automatic stabilizer.

8. Increased budget deficits

Answer

	a.	can cause interest rates to increase and hence decrease net exports
	b.	have no effect on net exports
	c.	can cause interest rates to decrease and hence increase net exports
	d.	never impose additional interest costs on the government

9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

	a.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.
	b.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.
	c.	increasing borrowing is the best option
	d.	increasing current taxes is the best option

10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

	a.	right; decrease; increase
	b.	right; decrease; decrease
	c.	left; decrease; decrease
	d.	left; increase; increase
	e.	right; increase; increase

11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

	a.	A decrease of $35
	b.	An increase of $105
	c.	An increase of $35
	d.	A decrease of $105
	e.	A decrease of $15

12.12. The term fiscal policy refers to

Answer

	a.	the adjustment of the GDP for inflation.
	b.	the purchase and sale of U.S. government securities to regulate the money supply.
	c.	the use of government spending and taxation to influence the level of economic growth and inflation.
	d.	the use of fines to penalize unfair business practices.
	e.	a policy action by Congress to overrule unpopular budget cuts by the president.

13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

	a.	raise the price level and leave real GDP unchanged.
	b.	raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
	c.	raise both real GDP and the price level by a multiple of the initial spending increase.
	d.	have no effect on real GDP or on the price level, because all private investment will be crowded out.
	e.	lower real GDP by an amount equal to the spending increase and reduce inflation.

14. Which of the following is not a means to finance government spending?

Answer

	a.	Government subsidies
	b.	Government debt
	c.	Capital gains taxes
	d.	Personal income taxes
	e.	Money creation

15. An automatic stabilizer is

Answer

	a.	a change in government spending aimed at achieving a policy goal.
	b.	an element of fiscal policy that automatically changes in value as real GDP changes.
	c.	an element of monetary policy that automatically changes in value as real GDP changes.
	d.	a decrease in tax rates as the economy moves into a recession.
	e.	a deliberate change in taxation aimed at increasing real GDP.

16. Budget deficits tend to grow during recessions because

Answer

	a.	real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.
	b.	real GDP growth is positive, which reduces both tax receipts and transfer payments.
	c.	real GDP growth is negative, which reduces transfer payments in relation to tax receipts.
	d.	real GDP growth is negative, which reduces tax receipts in relation to government expenditures.
	e.	real GDP growth is positive, which increases tax receipts in relation to government expenditures.

27.Individuals with low incomes probably

a. pay no Social Security tax

b. pay more Social Security tax than income tax

c. pay less Social Security tax than personal income tax

d. pay no taxes at all

e. are avoiding most of their tax payments

28. Which of the following is true?

a. The federal budget deficit is a flow and so is the national debt.

b. The national debt is both a stock and a flow.

c. The federal budget deficit is a stock and the national debt is a flow.

d. The federal budget deficit is a flow and the national debt is a stock.

e. The federal budget deficit is stock and so is the national debt.

30. When the U.S. government runs a deficit, it usually does the following:

a. it buys government bonds from the public

b. it asks the Treasury Department to print money to pay for the deficit

c. it sells new government bonds to the public

d. it borrows money directly from the Federal Reserve

e. it asks the Federal Reserve to print money to pay for the deficit

32. Under what condition can the U.S. government continue to pay interest on a rising debt without eventually needing to increase the average tax rate?

a. if the national debt grows at the same rate as nominal GDP

b. if the nominal interest on the national debt grows faster than nominal GDP

c. if the total interest payments on the national debt grow faster than nominal GDP

d. if the national debt grows faster than nominal GDP

e. if the real interest on the national debt grows faster than real GDP

34.The national debt

a. will be zero when the federal budget is balanced.

b. has been shrinking in the last 30 years.

c. is equal to the governmentâs budget deficit.

d. can grow without negative economic effects.

36.In the long run,

a. an increase in the federal budget deficit can lower the interest rate and investment spending.

b. an increase in the federal budget deficit can raise the interest rate and investment spending.

c. a decrease in the federal budget deficit can lower the interest rate and raise investment spending.

d. a decrease in the federal budget deficit can raise the interest rate and lower investment spending.

44. If the Fed conducts open market purchases (of bonds), we should expect to see the money supply

a. decrease, the interest rate increase, autonomous consumption decrease, business investment decrease, and real GDP decrease

b. increase, the interest rate decrease, autonomous consumption decrease, business investment decrease, and real GDP decrease

c. increase, the interest rate decrease, autonomous consumption increase, business investment increase, and real GDP increase

d. decrease, the interest rate decrease, autonomous consumption increase, business investment increase, and real GDP decrease

e. decrease, the interest rate increase, autonomous consumption increase, business investment increase, and real GDP increase

48. In the classical model the interest rate is determined in the money market; in the short-run macro model, the interest rate is determined in the market for loanable funds.

a. true

b. false

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ECON 110 Chapter Notes - Chapter 22: Disposable And Discretionary Income, Autonomous Consumption, Consumption Function

ECON 110 Full Course Notes

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