Chapter 17

Which of the following statements is correct? The trade surplus equals (a) the government surplus plus the private sector surplus, (b) the government deficit plus the private sector surplus or (c) the government deficit plus the private sector deficit.

Equilibrium output in a closed economy is \(£ 1000\), consumption is \(£ 800\) and investment is \(£ 80\). (a) Deduce \(G\). (b) Investment rises by \(£ 50\). The marginal propensity to consume out of national income is \(0.8\). What are the new equilibrium levels of \(Y, C, I\) and \(G\) ? (c) Suppose instead that \(G\) had risen by \(£ 50\). What would be the new equilibrium levels of \(Y, C, I\) and \(G ?\) (d) If potential output is \(£ 1200\), to what must \(G\) rise to make output equal potential output?

Is the ratio of government debt to GDP a useful indicator of a government's indebtedness? When could it be misleading?

Essay question 'By 2007, the UK had had over 50 consecutive quarters of steady growth. This period coincided with the period in which it was decided to make the Bank of England responsible for macroeconomic stabilization. Because interest rates can be changed easily and quickly, whereas tax rates and spending programmes cannot, this example confirms the superiority of monetary policy over fiscal policy in demand management.' Is this broadly correct? Can you think of examples in which fiscal policy would still be crucial? Did events after 2007 help vou answer this question?

Suppose the marginal propensity to consume out of disposable income is \(0.8\), the marginal tax rate is \(0.5\) and the marginal propensity to import is \(0.8\). Draw a diagram showing the 45 -degree line and the aggregate demand schedule using the diagram in which planned injections equal planned leakages. (a)How does this diagram differ from those earlier in the chapter? (b) What is the size of the multiplier? (c) Illustrate graphically the effect of a shift in aggregate demand using the diagram in which planned injections equal planned leakages.