Economics: Chapter 11

What gave federal government the power to tax income?

16th amendment of the Constitution

what's the formula for computing the desired stimulus?

AD shortfall divided by the multiplier

What's the general formula for computing the desired stimulus?

AD shortfall/the multiplier

Jack has an MPC of 0.82 and Jill has an MPC of 0.78. Ceteris paribus, if the government transfers income from people who behave like Jack to people who behave like Jill, What happens to AD?

AD will decrease

MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion, what happens to AD?

AD will increase by $100 billion balanced budget multiplier is equal to 1. A $100 billion increase in government expenditures combined with increase in taxes increases AD by $100 billion

IF income transferred from individuals with low MPC to those with high MPC, what would happen to AD?

AD would increase

The desired tax cut to close a GDP gap is given by

Desired fiscal stimulus divided by MPC

A tax cut intended to increase AD is an example of

FISCAL Stimulus

What would Keynes recommend?

Higher taxes when there is excess AD

Keynes said the level of economic activity is determined by what?

Level of AD

What's a desirable outcome of fiscal policy?

MOre jobs

The total change in aggregate spending generated by increased government spending depends on the

MPC marginal propensity to consume

If the recessionary gap is $500, then the proper fiscal stimulus when faced with an upward sloping AS curve is to...

Shift the AD curve rightward by more than $500 to reach full employment equilibrium the AD curve must shift by an amount greater than the GDP gap

IF the MPC is 0.80, a $200 billion tax decrease will increase consumption in the first round by?

When the gov decreases taxes the initial surge in consumption will be less than the tax cut. THe initial injection is equal to the MPC times the tax cut $200 billion *0.80= $160 billion

a tax cut has a smaller impact on AD than an increase in government purchases of the same size b/c?

a portion of the tax cut is saved tax cuts are less stimulative

What causes the level of income to change by the greatest amount?

an increase in defense spending of $10 billion tax cuts and transfer payments are less stimulative than government purchases of equal size

what does the balanced budget multiplier say?

an increase in government spending paid for by a tax increase of equal size shifts the AD rightward

What's the best choice to eliminate a recessionary gap if the desired fiscal stimulus is $10 billion and the AD shortfall is $100 billion, while the MPC is 0.90?

desired fiscal stimulus divided by the MPC $10 billion/0.90 = $11.1 billion

to eliminate a AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by?

formula for desired stimulus is AD shortfall divided by the multiplier 1/(1-.5)= 1/2 1/2*100= $50 billion

if the AD shortfall equals $600 billion, then the federal gov can close it by increasing...

government spending by less than $600 billion

If the government purchases multiplier is four and a change in government spending leads to a $500 million decrease in aggregate demand, what can be concluded?

government spending decreased by $125 million AD shortfall divided by the multiplier; $500 million divided by four is equal to $125

In a diagram of AD and AS curves, the AD shortfall is measured as the...

horizontal distance b/w the AD curve necessary for full employment and the AD curve that intersects AS at the equilibrium price

What's a way out of a recession according to Keynes?

increase consumer spending on goods/services

What are the fiscal policies available to increase AD?

increase government spending, decrease taxes, or increase transfer payments

What fiscal policy causes a decrease in aggregate expenditures?

increase in taxes and decrease in government spending

if the MPC is 0.75, in order to eliminate an AD shortfall of $200 billion the government should?

increase spending by $50 billion

Which is a fiscal policy tool used to stimulate the economy?

increased government purchases

MPS of 0.25 means a $50 million tax cut does what?

increases spending by $150 million MPC must be 0.75 b/c MPC + MPS = 1 $50*0.75=$37.5 is the initial change in consumption and the change in spending is $37.5 *4= $150 million

What provides fiscal stimulus to the economy?

increasing transfer payments

Nearly half of the federal government's tax revenues come from what?

individual income taxes

What do you know about a tax cut?

it contains less fiscal stimulus than an increase in government spending of the same size

What are income transfers?

payments to people with no goods/services exchanged

What do fiscal policy work through?

shifts of the AD curve

If the fiscal stimulus is $20 billion and the desired AD increase is $50 billion, we can conclude that...

the MPC is 0.60 $50 billion divided by $20 billion

what formula is used to find the cumulative increase in AD from a particular fiscal stimulus?

the multiplier * fiscal stimulus

If AD increases by the amount of recessionary GDP gap and AS is upward sloping, what happens to the recessionary GDP gap?

the recessionary GDP gap will still exist

IF economy is at full employment and prices are reasonable stable, the government wants to increase spending for public schools, which policy has least inflationary impact?

to prevent inflation, tax increases would have to be larger than the increase in spending to prevent AD from increasing and causing an increase in inflation Answer: an increase in taxes by an amount greater than the increase in spending

What happens when government increases spending to move economy to full employment?

total change includes new government spending and increase in consumer spending

What's an income transfer?

unemployment benefits paid to factory workers laid off

What's fiscal policy?

use of government taxes and spending to alter macroeconomic outcomes