ECO 1302 Chapter Notes - Chapter 11: Aggregate Demand, Fiscal Policy, Disposable And Discretionary Income

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5 Mar 2017

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Disposable income = gdp taxes (amount available to consumers) Any increase in taxes shifts the consumption schedule downward, and any tax reduction shifts the consumption schedule upward. The (cid:373)ultiplier (cid:449)orks through a (cid:272)hai(cid:374) of spe(cid:374)di(cid:374)g a(cid:374)d respe(cid:374)di(cid:374)g, as o(cid:374)e perso(cid:374)"s e(cid:454)pe(cid:374)diture (cid:271)e(cid:272)o(cid:373)es a(cid:374)other"s i(cid:374)(cid:272)o(cid:373)e. The multiplier for changes in taxes is smaller than the multiplier for changes in government purchases because not every dollar of tax cut is spent. An increase or decrease in taxes will have a multiplier effect on equilibrium gdp on the demand side. Tax reductions increase equilibrium gdp, and tax increases reduce it. The multiplier is reduced by an income tax because an income tax reduces the fraction of each dollar of gdp that consumers actually receive and spend. Two different ways in which taxes modify the multiplier: tax changes have a smaller multiplier effect than spending changes by government or others, an income tax reduces the multipliers for both tax changes and changes in spending.

Related Questions

Why is there a "two-way" link between consumption and GDP? â¢ How does an increase in disposable income affect the consumption function? An increase in expected future income? â¢ If the consumption function shifts upward, what happens to the saving function? Why? â¢ When is actual aggregate expenditure different from planned aggregate expenditure? Why happens to being the two back to equality? â¢ Explain why income taxes reduce the size of the expenditure multiplier. â¢ When the equilibrium real GDP is below potential GDP, how does the unemployment rate compare with the natural rate? What is the results of this state of affairs that restores the long-run equilibrium? â¢ What is a recessionary gap? How does the economy adjust to eliminate a recessionary gap?

10,A change in the price levelâ ________ the AE curve andâ ________ the AD curve.

âshifts; shifts

has no effectâ on; results in a movement along

results in a movementâ along; results in a movement along

results in a movementâ along; shifts

âshifts; results in a movement along

17,When the price levelâ falls, the aggregate planned expenditure curve shiftsâ ________, equilibrium expenditureâ ________ and there is a movementâ ________ along the aggregate demand curve.

âupward; increases; upward

âdownward; decreases; downward

âupward; decreases; downward

âupward; increases; downward

âdownward; increases; upward

21,Which of the following increases the size of the expenditureâ multiplier?

an increase in autonomous spending

a decrease in the marginal propensity to consume

a decrease in the marginal propensity to import

an increase in the marginal income tax rate

an increase in investment

23,If the quantity of real GDP demanded is greater than the quantity of real GDPâ supplied, then

the price level falls and firms decrease production.

aggregate demand changes to restore equilibrium.

the economy must be producing at potential GDP.

the price level falls to restore the macroeconomic equilibrium

the price level rises and firms increase production.

24, ________ can trigger an expansion.

Equality between aggregate expenditure and real GDP

A decrease in induced expenditure

A downward shift of the AE line

An increase in autonomous expenditure

A decrease in autonomous expenditure

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True or False Questions:

1. Recessionary Expenditure Gap- Aggregate expenditures by which aggregate expenditures at the full employment GDP falls short of those required to achieve full employment GDP.

2. Private Closed Economy- An economy that includes consumer, business, and government segments of the economy.

3. Lump-sum taxes- A tax of a constant amount so the government obtains the same amount of tax at each level of GDP.

4. Aggregate Supply schedule- A relationship between a nation's price level and the amount of real domestic output that is produced.

5. Real Rate of Interest effect- The Nominal Rate of Interest earned on a project.

6. Savings- savings are planned investments by the consumer.

7. Wealth effect- The dollar amount of all the assets owned minus the dollar amount of all the liabilities or debt.

8. Savings Schedule - GDP less investment = savings

9. Aggregate Demand Schedule- a schedule that shows the amount of a nation's output (real GDP) that buyers desire to purchase at each price level.

10. Productivity- The measure of the level of the nation of real output and the amount of resources used to produce the output, less labor cost.

11. Multiplier effect- Measures the change in GDP to spending.

12. Injection- Investment by private business into the economy for capital goods is and injection into the economy.

13. Consumption schedule- The measurement of Disposable income less savings.

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ECO 1302 Chapter Notes - Chapter 11: Aggregate Demand, Fiscal Policy, Disposable And Discretionary Income

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