Exam 9: The Government and Fiscal Policy

Explain the case where unplanned inventories increase.

Explain how some government tax revenue and spending can depend on the state of the economy.

Explain the government spending multiplier.

Assume lump-sum taxes are reduced by $500 billion and income rises by $1 trillion. Calculate the value of the tax multiplier.

Why does the tax multiplier differ from the spending multiplier?

In the media, the deficit is often defined as total outlays (spending plus transfers) minus total tax revenue. Economists, however, like to define the deficit as "G - T," where "G" includes only government purchases of goods and services, and "T" is net taxes. Prove that these two definitions are actually equivalent.

Explain why saving plus taxes must equal investment plus government spending in equilibrium.

Explain why the government spending multiplier is different from the tax multiplier.

Determine the impact of an increase in government spending of $5 billion when the MPC is .8. Determine the impact of a decrease in government spending of $2.5 billion when the MPS is 1/3.

What are the two types of macroeconomic policy channels that are available to the government and describe how they work?

What is discretionary fiscal policy?

Suppose the economy is slipping into a recession and the budget deficit begins to grow. In response Congress cuts government spending to reduce the deficit. What might the macroeconomic consequences of Congress' action?

Define the budget deficit.

Assume that you know that the government multiplier for the economy is 3. From this information calculate the tax multiplier.

If the tax multiplier is -2 what must be the value of the MPC. Show all work.

Determine the impact of an increase in taxes of $20 billion when the MPS is .25. Determine the impact of a decrease in taxes of $10 billion when the MPS is .2.

Discuss an important difference between the spending and tax multipliers.

Explain the balanced budget multiplier.

Why is it more important to be concerned with net tax revenue than gross tax revenue when judging the fiscal state of the government's budget?

Draw a graph of an economy's aggregate expenditure function. Using this graph, explain how equilibrium income is determined. Show graphically the effect on the equilibrium level of output if government spending and taxes are increased by the same amount. Explain why the balanced-budget multiplier equals 1.