Macroecon chapter 7

Question 1

Tax revenue function

Answer 1

T = tax rate(t) x GDP(Y)

Question 2

Disposable income function relation to tax revenue function

Answer 2

Yd = Y - T
Yd = Y - tY = (1 - t)Y

Question 3

Fiscal policy

Answer 3

Use of government tax and spending policies to achieve government objectives

Question 4

Government budget balance

Answer 4

Difference between government revenue and expenditures (T - G)

Question 5

If budget balance = 0…

Answer 5

Budget balanced

Question 6

If budget balance < 0

Answer 6

Decifit

Question 7

If budget balance > 0

Answer 7

Surplus

Question 8

Equivalence to import (iM)

Answer 8

Marginal propensity to import (mY)

Question 9

Net export formula (NX)

Answer 9

NX = (X - iM)

Question 10

What kind of curve is the NX curve

Answer 10

Down sloping curve

Question 11

Factors influencing NX curve

Answer 11

• Foreign income (yf)
• International relative price (Pd/Pf)

Question 12

Foreign income’s impact on net export

Answer 12

Positive (since its impact is positive on export)

Question 13

Change in foreign income on graph

Answer 13

Increase: NX curve shifts up
Decrease: NX curve shifts down

Question 14

Relative price impact on net export

Answer 14

Negative

Question 15

Relative price impact on import

Answer 15

Positive

Question 16

Change in international relative prices on graph

Answer 16

Increase: X/NX curve shift downward, iM curve rotates up
Decrease: X/NX curve shift upward, iM curve shift downward
In the end, the NX curve shifts and rotates

Question 17

Key factor influencing relative price (Pd/Pf)

Answer 17

Exchange rate

Question 18

Exchange rate impact on relative price

Answer 18

Negative => depreciation

Question 19

AE function (Y*)

Answer 19

AE = C + I + G + NX

Question 20

Autonomous component of AE (A0)

Answer 20

A0 = C0 + I0 + G0 + X0

Question 21

Induced component of AE (z)

Answer 21

z = [mpc (1-t) - m]

Question 22

Simple multiplier function

Answer 22

1 / (1 - z) or ΔY / ΔA0

Question 23

Fiscal policy impact on Y*

Answer 23

AE curve upward: G↑
AE curve downward: G↓
AE curve rotates upward: t↓
AE curve rotates downward: t↑

Question 24

Types of fiscal policy (2)

Answer 24

• Contractional
• Expansionary

Question 25

Factor influencing the simple multiplier

Answer 25

- Tax rate - import - mpc

Question 26

Import impact on simple multiplier

Answer 26

Negative

Question 27

MPC impact on simple multiplier

Answer 27

Positive

Question 28

Tax rate impact on simple multiplier

Answer 28

Negative