Q: Suppose the government enacts a $$100$$ billion tax cut and the MPC is $$0.75. $$What is the total change in equilibrium real GDP?

$$100 \times \frac{0.75}{1-0.75} = 300$$ billion

Question 1

Which of the following best defines fiscal policy?

Accepted Answer

Changes in federal government purchases, transfer payments, and taxes intended to achieve macroeconomic policy objectives.

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8. What is the government purchases multiplier?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 3

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 4

If the government increases both purchases and taxes by $$20$$ billion, and the MPC is $$0.75$$, what is the short-run effect on real GDP?

Accepted Answer

Real GDP increases by $$20$$ billion.

Question 5

Which of the following best describes the crowding out effect?

Accepted Answer

A decline in private expenditures as a result of an increase in government purchases.

Question 6

During the Covid-19 recession, the U.S. government enacted a large expansionary fiscal policy. What was one major short-term consequence of this action?

Accepted Answer

A large increase in the federal budget deficit.

Question 7

If the marginal propensity to import (MPI) increases, what happens to the government purchases multiplier in an open economy?

Accepted Answer

The multiplier decreases because more spending leaks out as imports.

Question 8

Which of the following is NOT a reason why fiscal policy may be less effective than monetary policy for stabilizing the economy?

Accepted Answer

Immediate effect on aggregate demand.

Question 9

Suppose the government enacts a $$100$$ billion tax cut and the MPC is $$0.75. $$What is the total change in equilibrium real GDP?

Accepted Answer

$$100 	imes \frac{0.75}{1-0.75} = 300$$ billion

Question 10

Which of the following best describes a tax wedge?

Accepted Answer

The difference between the pretax and posttax return to an economic activity.

Question 11

Which of the following is a supply-side effect of fiscal policy?

Accepted Answer

Cutting marginal tax rates to increase incentives to work and invest.

Question 12

If the government runs a budget deficit, how does it typically finance this deficit?

Accepted Answer

By selling Treasury securities.

Question 13

Which of the following statements about automatic stabilizers is correct?

Accepted Answer

They help limit the severity of recessions by increasing government spending or reducing taxes automatically.

Question 14

Suppose the government increases its purchases by $$50$$ billion, the MPC is $$0.6$$, and there are no taxes or imports. What is the total change in equilibrium real GDP?

Accepted Answer

$$50 	imes \frac{1}{1-0.6} = 125$$ billion

Question 15

Which of the following is a potential long-run problem of a rising national debt relative to GDP?

Accepted Answer

It can crowd out private investment, reducing long-term economic growth.

Question 16

Which of the following is most likely to increase the size of the government purchases multiplier?

Accepted Answer

A lower tax rate.

Question 17

If the government increases transfer payments, what is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand increases due to higher disposable income and consumption.

Question 18

Which of the following is a reason why the tax multiplier is smaller (in absolute value) than the government purchases multiplier?

Accepted Answer

A tax cut is partially saved and partially spent.

Question 19

Which of the following best describes the effect of a contractionary fiscal policy in the dynamic aggregate demand and aggregate supply model?

Accepted Answer

It shifts the aggregate demand curve to the left, reducing inflation.

Question 20

Which of the following is a plausible policy response to the long-term funding challenges of Social Security and Medicare?

Accepted Answer

Increasing taxes, reducing benefits, and finding ways to reduce medical costs.

Chapter 16: Fiscal Policy – Macroeconomics Study Notes

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