Question 1

Assume the following behavioral equations for a macroeconomy: C = 100 + .9Y_d , I = 50, T = 100 and G = 40 Calculate the equilibrium level of output.

Accepted Answer

In equilibrium AE = Y . Since AE = C + I + G we can write C + I + G = Y . Rewriting the consumption function yields: 100 + .9 ( Y - 100) since Y = Y - T . This reduces to 10 + .9 Y . When added to I and G yields 10 + .9 Y + 50 + 40. Combining terms this equals 100 + .9 Y . Since this is AE we must then set it equal to Y and solve for Y . We then get 100 + .9 Y = Y . Rearranging and solving for Y yields 1000.

Question 2

Define the budget deficit.

Accepted Answer

The budget deficit is the difference between what the government spends and what it collects in taxes.

Question 3

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?

Accepted Answer

Unplanned inventories would fall. The reason is that the economy is currently in equilibrium with aggregate expenditures at $9 trillion. If government increases spending by $100 billion then spending will be greater than the level of output causing a drawing down of inventories.

Question 4

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

Accepted Answer

The answer of If the government wants to reduce unemployment...

Question 5

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

Accepted Answer

The answer of Given that Yd $\equiv$ C + S,...

Question 6

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?

Accepted Answer

The answer of Suppose the economy is slipping into a...

Question 7

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.

Accepted Answer

The answer of In the media, the deficit is often...

Question 8

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

Accepted Answer

The answer of What are the two types of macroeconomic...

Question 9

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?

Accepted Answer

The answer of Suppose the economy is slipping into a...

Question 10

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

Accepted Answer

The answer of Explain why it might not be necessary...

Question 11

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)

Accepted Answer

The answer of Assume that the consumption function for the...

Question 12

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?

Accepted Answer

The answer of Assume that an economy is operating at...

Question 13

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

Accepted Answer

The answer of Write out the modified algebraic representation of...

Question 14

Define net taxes.

Accepted Answer

The answer of Define net taxes....

Question 15

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?

Accepted Answer

The answer of Why is it more important to be...

Question 16

How can government affect investment behavior?

Accepted Answer

The answer of How can government affect investment behavior?...

Question 17

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

Accepted Answer

The answer of How would a weak economy affect the...

Question 18

What is discretionary fiscal policy?

Accepted Answer

The answer of What is discretionary fiscal policy?...

Question 19

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

Accepted Answer

The answer of How would a strong economy affect the...

Question 20

Write the equation for disposable income and identify each component.

Accepted Answer

The answer of Write the equation for disposable income and...

Quiz 9: The Government and Fiscal Policy

Assume the following behavioral equations for a macroeconomy: C = 100 + .9Yd , I = 50, T = 100 and G = 40 Calculate the equilibrium level of output.