Naked Economics Chapter 1

Chapter 11
1. Fiscal policy can be described as the use of government purchases, taxes, transfer payments, and government borrowing with an objective of influencing economy-wide variables such as the employment rates, the economic growth, and the rates of inflation (McEachern, 2015).
1. When all other factors are held constant, a decrease in government purchases will lead to an increase in the real GDP demanded
2. An increase in net taxes, holding other factors constant, will lead to an increase in the real GDP demanded.
3. A reduction in transfer payments when all other factors are held constant will have no effect in the real GDP demanded.
4. A decrease in the Marginal propensity to consume will decrease consumption spending and therefore, decrease the GDP

Tax cuts reduce the recessionary gap. Therefore, in order to eliminate the recessionary gap, there is need for falling tax collections i.e. tax cuts.
9. Classical economists assumed that the market forces through flexible prices, wages, and interest rates would move the economy toward potential GDP (McEachern, 2015). The assumption economists believed that natural market forces such as changes in prices, wages and interest rates could correct the problem of the market, thus the market is self-correcting. Keynesian economists believed that the economy is well controlled by manipulating demand for goods and services. According to Keynesian theory, wages and prices are not flexible.

Chapter 12
2. The budget requires the forecast of the economy so as to have a correct knowledge of how much tax revenue it will be needed and how much it will have to spend in order to ensure maximum performance. The budget also requires forecast in order to monitor the spending on different points of the business cycle.
5. The federal debt has tremendously increased as a measured relative to GDP since 2008.
8.
A. Assuming an initial gross national debt of $3trillion and a $300 billion deficit by the federal