Exam 9: The Government and Fiscal Policy

How do the values of the tax multiplier and the government spending multiplier change as the MPC increases? Explain why the multipliers change. If the MPC were 0, what would the government spending and tax multipliers equal? If the MPC were 1, what would the government spending and tax multipliers equal?

What would be the effect of a cut in taxes of $100 billion on the economy if the marginal propensity to consume were .9? Explain why this policy is much different from simply having the government initiate a $100 billion spending program. Support your answer with specific calculations.

If the government wants to reduce unemployment what are some ways it should change spending and taxes?

Define automatic stabilizers.

Why do you suppose that state governments cannot rely on automatic stabilizers but the federal government can?

Assume that the government spending multiplier is equal to 4. Calculate the tax multiplier from this information.

The the primary purpose of the shock absorber in an automobile is to control spring and suspension movement. This is accomplished by turning the kinetic energy of suspension movement into thermal energy to be dissipated through the hydraulic fluid. How is this similar to the automatic stabilizers of the economy. Why does neither of these necessarily imply a "smooth ride"?

Define net taxes.

Assume that the consumption function for the above economy is C = 1000 + .75Yd fill in the empty cells. (All Figures are in Billions of Dollars)

Explain what would be the impact of a decrease in lump-sum taxes on the slope of the consumption function.

Write out the modified algebraic representation of the consumption function when taxes are included.

-If the aggregate consumption function is C = 100 +.9Yd what is the level of consumption if income is $3000 and net taxes are $100. Show all work.

Why might a balanced budget requirement be potentially destabilizing for the economy?

Assume that the economy is in equilibrium at $9 trillion and the government increases spending by $100 billion. What would happen to unplanned inventories and why?

Given that Yd $\equiv$ C + S, prove that Y $\equiv$ C + S + T. Explain the importance of this relationship.

Assume that an economy is operating at full employment and furthermore there is a government budget surplus. What might be the macroeconomic impact if Congress decides to take the budget surplus and return it to taxpayers as a rebate?

-If the aggregate consumption function is C = 100 +.8Yd what is the level of consumption if income is $2000 and net taxes are $200. Show all work.

How can government affect investment behavior?

Assume an economy is represented by the following: (a) Calculate the equilibrium level of output. (b) Based on your analysis in Part (a), calculate the levels of consumption and saving that occur when the economy is in equilibrium. (c) Now suppose planned investment rises by 100. Calculate the new equilibrium level of income. Given your answer, what is the size of the multiplier? (d) What is the size of the tax multiplier for this economy?

Write out the formula for the tax multiplier and explain why a higher MPC would generate a more negative tax multiplier.