Tax multiplier is the coefficient that determines the effect of a change in taxes on the level of income.

Great Depression is the period started in 1929 and lasted through 1930s.

Leakages are used to denote reductions in autonomous components of aggregate expenditures. It is possible to mention three types of leakages from the income-expenditure flow: savings, taxes and imports for an open economy. In other words, leakages are the factors that cause autonomous components of aggregate expenditures to reduce.

Net national product is found by subtracting amortization calculated for that period from GNP. To get the NNP figure, official statisticians of the government estimate the amortization amount in the country and subtract this value from GNP.

Public expenditure, in a broad sense, includes all expenditures of public institutions and organizations out of budget system, as well as the expenditures within the government budget. From the point of this definition, it includes the sum of general budget and special budgets of all segments of public sector, budgets of regulatory and supervisory authorities, local administrations, funds and social security institutions, floating capital institutions, public economic enterprises and other public institutions.

Saving function is the relationship between income level and saving.

There are different factors that influence the consumption decisions of households. Some of these factors are not related to income. These factors include disposable income, wealth, future expectations (about wealth, income and prices) and demographic factors. Expected profit is not one of these factors.

Transfer expenditures can be divided into four groups. These are as follows:

Economic Transfers, Financial Transfers, social transfers and debt payments.

In the macroeconomics literature, the term “twin deficits” refers to the economic environment in which the public sector gives budget deficit, and balance of foreign trade gives deficit at the same time.

Any change in taxes affects income inversely via tax multiplier.

Switching to a capital-intensive technique in a region where a labor-intensive production method has been implemented for a long time makes the labor used unnecessary and this causes technological unemployment.

The rise in the capacity of economy to produce goods and services is called as economic growth.

Autonomous consumption is the portion of consumption expenditures that is independent of income.

When examining the determination of national income in an economy, we will assume that the investments are autonomous to simplify the analysis, i.e. independent of the current income level. However, this does not mean that we assume that investments are fixed at a certain level. There are a number of factors that cause investment spending to change. We assume that GDP is not one of these factors. In this case, we can draw autonomous investment expenditures parallel to the horizontal axis. This means that if the income increases or decreases, the autonomous investment expenditures will not be affected. In the figure, the investment function (line I) shows that investments at each income level are equal to fixed quantity.

In the equilibrium approach of the Classical model, thanks to the smooth operation of the market mechanism, the economy is in constant balance, that is, at full employment. The classical model explains the continuous realization of employment in the economy, based on Say’s Law, which states that “every supply creates its own demand”. According to this law, a certain amount of income is generated as a result of the production of goods and services.

Microeconomics analyses how a market for a single good operates and how individual decision makers (households and businesses) behave. Some practical conclusions like how markets operate, how scare resources are allocated among alternatives had been obtained by making assumptions about behaviors of these economic decision makers.

Since an increase in autonomous taxes decrease total spending, the aggregate expenditure (AE) function has to shift downward as indicated by the choice A.

For example, when the planned expenditure is greater than the value of current production, production will increase to meet the demand for goods and services.

The effect of tax changes on consumption expenditures is determined by subtracting marginal propensity to import (MPI) from marginal propensity to consume (MPC). Namely, the part of additional income actually consumed domestically is determined according to difference between marginal propensity to consume and marginal propensity to import. Increase in consumption expenditures determined according to this difference creates the multiplier effect.

Expansionary fiscal policy is the fiscal policy that aims to raise aggregate expenditures by increasing government spending and/or reducing taxes.