Econ 201 Ch 9

The aggregate consumption function is C = 100 + .6Yd. If income is $1,000 and net taxes are $300, consumption equals

520.

Tax Multiplier

= -(MPC/MPS)

Government Spending

= 1/MPS

Automatic Stabilizers

Are revenue and expenditure items in the budget that automatically change with the state of the economy in such a way as to stabilize GDP

Balanced-Budget Multiplier

1

The formula for the government spending multiplier is

1/MPS.

If the MPS is 0.1, the government spending multiplier is

10

Discretionary Fiscal Policy

Change in taxes or spending that are the result of deliberate changes in government.

Federal Surplus (+) or deficit (-)

Federal government receipts minus expenditures.

Fiscal Policy

Government policies concerning taxes band spending.

Cyclical Deficit

Is the deficit that occurs because of a down turn in the business cycle

Structural Deficit

Is the deficit that remains at full employment

Fiscal Drag

Is the negative affect on the economy that occurs when average tax rates increase because tax payers have moved into higher income brackets during expansion

Full-Employment Budget

Is what the budget would be if the economy were producing at a full-employment level of output

Automatic Destabilizers

Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to destabilize GDP.

Net Taxes

Taxes paid by firms and households to the government minus transfer payments made to households by the government.

Federal Budget

The budget of the federal government.

Budget Deficit

The difference between what a government spends and what it collects in taxes in a given period: G-T

Privately Held Federal Debt

The privately held (non-government-owned) debt of the U.S government.

Balanced-Budget Multiplier

The ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create and deficit. The balanced-budget multiplier is equal to 1: the change in Y resulting from the change in G and the equal change in T are exactly the same size as the initial change in G or T.

Tax Multiplier

The ratio of change in the equilibrium level of output to a change in taxes.

Government Spending Multiplier

The ratio of the change in the equilibrium, level of output to a change in government spending.

Monetary Policy

The tools used by the Federal Reserved to control the short-term interest-rate; the behavior of the Federal Reserved concerning the nations money supply.

Federal Debt

The total amount owed by the federal government.

Disposable, or after-tax, Income (Yd)

Total income minus net taxes: Y-T

If the government runs a deficit, then the government debt increases.

True

Disposable Income

YD= Y - T0

If the economy's full-employment output is $6 trillion, actual output is $3.5 trillion, and the budget deficit is $20 billion, the deficit in this case is known as a

cyclical deficit.

The leader of Atlantis hires you as an economic consultant. He is concerned that the output level in Atlantis is too low and that this will cause prices to fall. He feels that it is necessary to increase output by $200 billion. He tells you that the MPC in Atlantis is 0.8. Which of the following would be the best advice to give to the Atlantis president

decease taxes by $50 billion

If government purchases are decreased by $800 and taxes are decreased by $800, the equilibrium level of income will

decrease by $800.

If the tax multiplier is −12 and taxes are increased by $6 billion, output

falls by $72 billion

If government purchases increase by $100, equilibrium output ________; and if taxes increase by $100, equilibrium output ________.

increases by $1,000; decreases by $900

When a government runs a deficit

its debt increases.

The difference between what a government spends and what it collects in taxes in a year is

the government budget deficit or surplus.

The tax multiplier is

the ratio of the change in the equilibrium level of output to the change in taxes.

Fiscal policy refers to

the spending and taxing policies used by the government to influence the economy.

If the MPC is 0.7, the tax multiplier is

−2.33.

Bill's income is $1,000 and his net taxes are $350. His disposable income is

$650.

Taxes are reduced by $15 billion and income increases by $75 billion. The value of the tax multiplier is

-5

If the MPC is 0.9, the tax multiplier is

-9