Economics Chapter 7 Quiz
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Questions and Answers

What is the definition of net taxes (T)?

  • The overall tax burden on businesses only
  • Total income collected by the government from firms and households
  • Taxes paid by firms and households minus government transfer payments (correct)
  • Income generated from public services provided by the government

    • What calculates disposable income (Yd)?

  • Y - T (correct)
  • Y - G
  • Y + T
  • Y + G

    • How is a budget deficit defined?

  • The difference between government expenditures and tax revenue (correct)
  • The total amount of taxes collected by the government
  • The surplus of government funds available for services
  • The total income of households after taxes

    • How does the government influence planned investment?

    <p>Through tax treatment of depreciation and tax policies</p> Signup and view all the answers

    What does the modified consumption function depend on?

    <p>Disposable income instead of before-tax income</p> Signup and view all the answers

    What is the equilibrium output/income when government spending (G) and investment (I) are both fixed at 100?

    <p>900</p> Signup and view all the answers

    How is disposable income (Yd) calculated in the context provided?

    <p>Y - T</p> Signup and view all the answers

    What does a negative unplanned change in inventory indicate?

    <p>Demand exceeds supply.</p> Signup and view all the answers

    In the provided data, at an output of 1,100, what is the level of saving?

    <p>150</p> Signup and view all the answers

    What is the combined effect of government spending (G) and investment (I) on the aggregate expenditure function?

    <p>It shifts the function upward.</p> Signup and view all the answers

    What defines fiscal policy?

    <p>The government’s spending and taxing policies</p> Signup and view all the answers

    Which of the following is NOT a type of multiplier discussed in the context?

    <p>Investment multiplier</p> Signup and view all the answers

    At an output of 300, what is the level of planned investment noted in the data?

    <p>100</p> Signup and view all the answers

    What is discretionary fiscal policy?

    <p>Changes in taxes or spending as a result of government decisions</p> Signup and view all the answers

    Which of the following best describes the relationship between taxes and government spending in fiscal policy?

    <p>They fluctuate in response to changes in the economy</p> Signup and view all the answers

    What reflects the adjustment to equilibrium when output is 1,300?

    <p>+100</p> Signup and view all the answers

    Which of the following statements is true about the federal budget?

    <p>It is influenced by the economy's performance</p> Signup and view all the answers

    What has a direct effect on fiscal policy multipliers?

    <p>The marginal propensity to consume (MPC)</p> Signup and view all the answers

    What happens to the government spending multiplier when taxes depend on income?

    <p>It falls</p> Signup and view all the answers

    Which policy instrument focuses on the nation’s money supply?

    <p>Monetary policy</p> Signup and view all the answers

    Which of the following best illustrates a fiscal policy response?

    <p>Decreasing taxes in response to a recession</p> Signup and view all the answers

    What is the planned aggregate expenditure when output is at 1,100?

    <p>1,100</p> Signup and view all the answers

    At which output level is there no unplanned change to inventory?

    <p>1,100</p> Signup and view all the answers

    If government spending (G) and taxes (T) are both at 300, what is the value of net taxes at an output of 1,500?

    <p>300</p> Signup and view all the answers

    What happens to planned investment at an output of 1,300?

    <p>It remains at 100</p> Signup and view all the answers

    What is the impact on unplanned inventory at an output of 1,300?

    <p>+50</p> Signup and view all the answers

    What is disposable income (Yd) at an output of 500?

    <p>200</p> Signup and view all the answers

    When output is 900, what is the difference between planned aggregate expenditure and output?

    <p>−50</p> Signup and view all the answers

    At what output level does consumption reach 1,000?

    <p>1,500</p> Signup and view all the answers

    What is the government spending multiplier?

    <p>The ratio of the change in the equilibrium level of output to a change in government spending.</p> Signup and view all the answers

    How does an increase in government spending affect the aggregate expenditure (AE) function?

    <p>It shifts up by the amount of government spending increase.</p> Signup and view all the answers

    After increasing government spending by 50, what is the new equilibrium output level if the original output was 900?

    <p>1,100</p> Signup and view all the answers

    What is the effect of an increase in output on consumption, based on the data provided?

    <p>Consumption increases as a result of higher disposable income.</p> Signup and view all the answers

    At an output level of 1,300, what is the relationship between planned spending and unplanned inventory changes?

    <p>Unplanned inventory changes exceed planned spending.</p> Signup and view all the answers

    What is the net disposable income (Yd) formula as per the provided data?

    <p>Yd = Y - T</p> Signup and view all the answers

    At the original equilibrium output of 900, what is the level of unplanned inventory change?

    <p>−50</p> Signup and view all the answers

    What happens to savings at the output level of 1,100?

    <p>Savings increase to 150.</p> Signup and view all the answers

    What is the primary reason for the projected increase in federal debt to over 100% of GDP by 2039?

    <p>Costs associated with the aging population</p> Signup and view all the answers

    Which of the following best describes the term 'automatic stabilizers' in the context of the federal budget?

    <p>Revenue and expenditure items that change with the economy to stabilize GDP</p> Signup and view all the answers

    How is the 'full-employment budget' defined?

    <p>The federal budget at the level of full-employment output</p> Signup and view all the answers

    What is likely to happen when average tax rates increase due to fiscal drag?

    <p>The economy experiences a negative effect during expansions</p> Signup and view all the answers

    What type of deficit is characterized by remaining even when the economy is at full employment?

    <p>Structural deficit</p> Signup and view all the answers

    Which of the following factors contributes to a cyclical deficit?

    <p>Economic downturns affecting tax revenue</p> Signup and view all the answers

    What percentage of GDP was the federal debt estimated at by the Congressional Budget Office in 2014?

    <p>74%</p> Signup and view all the answers

    Which of the following best describes the term 'automatic destabilizers'?

    <p>Revenue items that destabilize GDP with economic changes</p> Signup and view all the answers

    Study Notes

    Chapter 24: The Government and Fiscal Policy

    • In macroeconomics, policy instruments include fiscal policy and monetary policy
    • Fiscal policy involves government spending and taxation policies
    • Monetary policy involves the central bank's actions regarding the nation's money supply
    • Taxes and government spending often react to economic changes
    • Discretionary fiscal policy is deliberate changes in taxes or spending

    Government Purchases (G), Net Taxes (T), and Disposable Income (Yd)

    • Net taxes (T) represent taxes paid by firms and households minus transfer payments to households
    • Disposable income (Yd) is total income minus net taxes (Yd = Y - T)
    • Planned aggregate expenditure (AE) = Consumption (C) + Planned Investment (I) + Government Purchases (G)
    • Y = AE (Equilibrium Condition)
    • The budget deficit is the difference between government spending (G) and collected taxes (T) (Budget Deficit = G - T)

    The Determination of Equilibrium Output (Income)

    • Equilibrium occurs when aggregate expenditure (AE) equals output (Y)
    • Y = C + I + G (Equilibrium Output Equation)

    Fiscal Policy at Work: Multiplier Effects

    • Key multipliers include government spending multiplier, tax multiplier, and balanced-budget multiplier
    • The government spending multiplier shows the ratio of the change in equilibrium output to a change in government spending.
    • The government spending multiplier is calculated as 1 / (1 - MPC), where MPC is the marginal propensity to consume
    • The tax multiplier is the ratio of the change in equilibrium output to a change in net taxes
    • Other multipliers exist which change with government actions

    The Government Spending Multiplier

    • The formula for the government spending multiplier is 1 / (1 - MPC)
    • The multiplier shows that a change in government spending will have a greater impact on the overall economy than the initial change in spending

    The Federal Government Budget

    • Fiscal policy since 1993, involves Clinton, Bush and Obama administrations and their data for personal income taxes, and federal government spending and transfers

    The Federal Government Debt

    • Federal debt represents the total amount owed by the Federal government

    The Economy's Influence on the Government Budget

    • Automatic stabilizers are revenue and expenditure items that adjust automatically with economic changes to stabilize GDP
    • Automatic destabilizers are items that impact GDP in a destabilizing way
    • Fiscal drag occurs when average tax rates rise due to income bracket changes during an economic expansion, hence decreasing GDP

    Full-Employment Budget

    • The full-employment budget estimates the budget if the economy operates at its full employment output level
    • A structural deficit remains at full employment
    • A cyclical deficit appears during economic downturns

    Review Terms and Concepts

    • These are key terms and concepts related to fiscal policy, presented on review slides

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    Principles Of Economics Chapter 24 PDF

    Description

    Test your understanding of key concepts from Economics Chapter 7. This quiz covers definitions and relationships related to net taxes, disposable income, budget deficit, government influence on investment, and modified consumption function. Challenge yourself and enhance your economic knowledge!

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