Exam 9: The Government and Fiscal Policy

Determine the net impact upon the nation's economy that results from equal decreases in spending and taxes of $5 billion when the MPC is .75.

Explain why it might not be necessary for the government to cut spending to reduce the deficit when the economy is expanding.

Prove that the balanced budget multiplier is equal to one by using the government and tax multipliers.

-Given the above model for the Falkland Island economy calculate the level of savings when the economy is in equilibrium.

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

Identify the broad contrasting views regarding the role of government within the macroeconomy.

What effect does an introduction of an income tax rate have on the size of the spending multiplier? Explain.

Calculate how much output would expand by if the government increased spending by $500 billion and financed this spending by increasing lump-sum taxes by the same amount.

How would a strong economy affect the size of the budget deficit?

Compare and contrast the following two proposals to deal with a federal budget surplus in an economy that is operating at full employment. Proposal #1 would require that significant portions of the surplus be returned to the public in the form of tax cuts. Proposal #2 would require that an equal portion instead be impounded to augment the Social Security Trust Fund. Make sure to point out the effect that each may have on inflation.

Write the equation for disposable income and identify each component.