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 (B)</p> Signup and view all the answers

What does the modified consumption function depend on?

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

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

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

What does a negative unplanned change in inventory indicate?

<p>Demand exceeds supply. (C)</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 (B)</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. (B)</p> Signup and view all the answers

What defines fiscal policy?

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

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

<p>Investment multiplier (C)</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 (D)</p> Signup and view all the answers

What is discretionary fiscal policy?

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

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

<p>+100 (A)</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 (B)</p> Signup and view all the answers

What has a direct effect on fiscal policy multipliers?

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

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

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

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

<p>Monetary policy (D)</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 (A)</p> Signup and view all the answers

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

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

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

<p>1,100 (D)</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 (B)</p> Signup and view all the answers

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

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

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

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

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

<p>200 (A)</p> Signup and view all the answers

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

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

At what output level does consumption reach 1,000?

<p>1,500 (D)</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. (D)</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. (D)</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 (C)</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. (B)</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. (C)</p> Signup and view all the answers

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

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

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

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

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

<p>Savings increase to 150. (C)</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 (A)</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 (B)</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 (B)</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 (C)</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 (B)</p> Signup and view all the answers

Which of the following factors contributes to a cyclical deficit?

<p>Economic downturns affecting tax revenue (D)</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% (A)</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 (D)</p> Signup and view all the answers

Flashcards

Macroeconomic Policy Instruments

Policy instruments used to manage the economy. They aim to influence economic activity, such as growth and inflation.

Fiscal Policy

Government spending and taxing policies used to influence the economy.

Monetary Policy

The central bank's actions related to the nation's money supply.

Discretionary Fiscal Policy

Changes in taxes or spending that are intentional, made to stabilize the economy.

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Automatic Stabilizers

Government spending and taxes often react to changes in the economy.

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Federal Budget

The federal government's annual budget, outlining its spending and revenue plans.

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Economy's Influence on the Budget

The influence of the economy on the government's budget.

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Fiscal Policy Multipliers

Used to measure the impact of changes in government spending on overall economic activity.

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Net Taxes (T)

Taxes paid by individuals and businesses to the government, minus transfer payments made by the government to individuals.

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Disposable Income (Yd)

The total income minus net taxes. It's the income households and businesses have left after paying taxes but before spending.

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Budget Deficit

The difference between what a government spends (G) and what it collects in taxes (T) in a given period.

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Consumption Function with Disposable Income

The relationship between the level of disposable income and the amount of consumption spending. It shows how much consumers will spend at various levels of disposable income.

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Planned Investment

The level of investment spending that firms plan to do at a given interest rate.

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Equilibrium output (income)

The level of output (income) where total planned spending (C + I + G) equals total output (income).

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Government spending multiplier

Measures how much output (income) changes as a result of a change in government spending.

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Tax multiplier

Measures how much output (income) changes as a result of a change in taxes.

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Balanced-budget multiplier

The combined impact of a simultaneous change in government spending and taxes of equal amounts.

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Consumption function

The relationship between disposable income (Yd) and consumption spending (C).

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Investment function

The tendency for planned investment (I) to decline as output (income) increases.

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Planned aggregate expenditure (AE)

The sum of consumption spending (C), planned investment (I), and government purchases (G).

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Unplanned inventory change

The difference between total output (income) and planned aggregate expenditure (AE). It represents the unintended change in business inventories.

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Equilibrium in the Economy

When the economy is at equilibrium, planned aggregate expenditure equals total output or real GDP (Y).

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Government Purchase Multiplier

The increase in planned aggregate expenditure caused by a one-unit increase in government purchases.

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Federal Debt

The total amount of money that the federal government owes to individuals, businesses, and other entities.

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Privately Held Federal Debt

The portion of the federal debt that's held by private entities, not by government agencies.

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Fiscal Drag

The negative effect on economic growth that happens when higher tax rates are applied as incomes rise during an economic boom.

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Full-Employment Budget

What the federal budget would look like if the economy were operating at full employment (no cyclical unemployment).

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Structural Deficit

The deficit that remains even when the economy is at full employment. It reflects structural imbalances in the federal budget.

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Cyclical Deficit

The deficit that occurs because of a downturn in the business cycle. It's a temporary effect of the economic slowdown.

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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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