homework4sol - Macroeconomic Principles Economics 1101...

Macroeconomic Principles
Economics 1101
Spring 2010
Homework Set 4: Solutions
Name :
TUiD :
• Section 1: Definition type questions. Each definition is worth 2 points.
• Section 2: Short answer questions. Each question is worth 10 points.
• Section 3: Numerical questions. Each question is worth 20 points.

1 Definitions
1. Aggregate Expenditure:
2. Autonomous Expenditure:
3. Consumption Function:
4. Autonomous Consumption:
5. Savings Function:
6. Marginal Propensity to Consume:
7. Marginal Propensity to Save:
8. Multiplier:
9. Equilibrium Output:
10. Disposable Income:
11. Budget:
12. Budget Surplus:
13. Budget Deficit:
14. Fiscal Policy:
15. Automatic Fiscal Policy:
16. Discretionary Fiscal Policy:
17. Crowding Out Effect:
18. Laffer Curve:
19. Ricardo Barro Effect:
20. Tax Wedge:
1

2 Short Answer Questions
1. A big part of macroeconomic research deals with the impact of fiscal policy. In the last two
homeworks we analyzed the impact of the increased government expenditure. Continuing with
that explain the impact of increased budget deficit in both the short and long run. It may be
useful to review the material on crowding out effect before you answer the question.
What you had in the last two homeworks was looking at the impact of increased government expenditure on
the current GDP. That is increased G will increase GDP since Y = C + I + G + NX, and ceteris paribus an
increase in G will increase Y. In the long run the story is slightly more complicated. While the government is
increasing expenditure it is not seeing a simultaneous income increase. The increased expenditure is coming
at the cost of a bigger deficit. The government has to finance it from somewhere, and in the process they