ECON2020 Ch. 9 study

With a consumption function of C ​= a ​+ b​(Y- T​), the government spending multiplier is represented as

1​ / (1 minus−b​).

Suppose all tax collections are fixed and independent of income and all spending and transfer programs are also fixed and do not depend on the state of the economy. In such a situation what is the relationship between the full employment deficit and actual budget​ deficit?

Actual budget deficit is the same as the full employment budget deficit.

If the marginal propensity to consume is 0.8 and the government increases taxes by​ $1,000, the equilibrium level of output will decrease by

$4,000.

govt spending multiplier =

1/MPS or 1/1-MPC

T/F If taxes are a function of​ income, the three multipliers​ (investment, government​ spending, and​ tax) are greater than they would be if taxes were a​ lump-sum amount.

F

T/F In the circular flow of​ income, net taxes are a leakage and household saving is an injection.

F

T/F The U.S. federal government ran a surplus in 2014.

F

Some economists claim World War II ended the Great Depression of the 1930s. The war effort was financed by borrowing massive sums of money from the public. How could a war end a​ recession?

If government spending increases and taxes do not​ change, then the amount of planned expenditures will increase which can cause the equilibrium level of income to rise.

Data for the simple economy of Newt show that in​ 2015, saving exceeded investment and the government is running a balanced budget. What is likely to​ happen?

Output will fall.

T/F In absolute​ value, the tax multiplier is smaller than the government spending multiplier.

T

T/F In a​ balanced-budget increase in government​ spending, ΔG=ΔT.

T

T/F The budget deficit is calculated as government spending minus tax revenues.

T

As a percentage of taxable income since​ 1993, federal personal income taxes were lowest in which of the following presidential​ administrations?

The Bush administrations.

As a percentage of GDP since​ 1993, federal transfer payments were lowest in which of the following presidential​ administrations?

The Clinton administrations

As a percentage of GDP since​ 1993, federal government debt was the highest in which of the following presidential​ administrations?

The Obama administrations.

Initial equilibrium equation:

Y = C + I + G

When government spending increases by​ $1, planned expenditures increase by​ $1

and the equilibrium level of income will increase by​ $1 times the spending multiplier.

Evaluate the following​ statement: ​"For an economy to be in​ equilibrium, planned investment spending plus government purchases must equal saving plus net​ taxes." The statement is

correct because an economy is in equilibrium when planned aggregate expenditure equals aggregate output ​(AE ​ = Y​).

When taxes are cut by​ $1, planned expenditures

increase by less than​ $1 and the equilibrium level of income will increase by​ $1 times the tax multiplier.

if saving exceeded investment and the govt is running a balanced budget, what is likely to happen to the economy of newt?

it would contract since the injection to the flow if income is less than th eleakage from the income flow

The​ balanced-budget multiplier is the

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

In an​ expansion, taxes rise and government expenditures​ fall, and therefore act as automatic​ ________. Inflation is more likely to increase in an expansion than in a​ recession, and therefore acts as an automatic​ ________.

stabilizers; destabilizer

The deficit that remains at full employment is called the

structural deficit.

The​ balanced-budget multiplier is equal to 1 because

the government spending multiplier plus the tax multiplier will equal 1.

The balanced budget multiplier is equal to

​(1 minus−MPC​)/MPS.

If output​ = 1,500 when planned aggregate expenditure​ = 1,200, the unplanned change in inventories will be​ ________ and output will​ ________ to adjust to the disequilibrium.

​positive; decrease

If the marginal propensity to consume is 0.8 and the government increases spending by​ $1,000, the equilibrium level of output will increase by

$5,000.

tax multiplier =

-(MPC/MPS) or -(1-MPS/MPS) or -(MPC/1-MPC)

Disposable income is equal to

.total income minus net taxes.