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
