Q: If the marginal propensity to consume (MPC) is 0.9 and the government increases taxes by $$20$$ billion, what is the expected change in equilibrium output?

$$-20 \times \frac{0.9}{1-0.9} = -180$$ billion

Question 1

Which of the following best describes discretionary fiscal policy?

Accepted Answer

Changes in taxes or spending that are the result of deliberate changes in government policy.

Question 2

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

Accepted Answer

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

Question 3

If the government increases both spending and taxes by $100 billion, and the MPC is 0.75, what is the total change in equilibrium output (Y)?

Accepted Answer

$$100$$ billion

Question 4

Which of the following equations correctly defines disposable income ($$Y_d$$)?

Accepted Answer

$$Y_d = Y - T$$

Question 5

A government runs a budget deficit when:

Accepted Answer

$$G \u003e T$$

Question 6

If the tax multiplier is $$-3$$ and the government cuts taxes by $$50$$ billion, what is the expected change in equilibrium output?

Accepted Answer

$$150$$ billion

Question 7

Which of the following best describes an automatic stabilizer?

Accepted Answer

A revenue or expenditure item that automatically changes with the state of the economy to stabilize GDP.

Question 8

If the government increases spending by $$40$$ billion and the MPC is $$0.6$$, what is the total increase in equilibrium output?

Accepted Answer

$$40 \div (1-0.6) = 100$$ billion

Question 9

Which of the following would cause the fiscal policy multiplier to decrease?

Accepted Answer

A decrease in the marginal propensity to consume (MPC).

Question 10

What is the main reason the aging of the population is projected to increase the federal debt in the long term?

Accepted Answer

Government spending on social programs like Social Security and Medicare increases.

Question 11

If net taxes are a function of income, $$T = T_0$ + tY$$, how does this affect the government spending multiplier?

Accepted Answer

The multiplier decreases.

Question 12

Which of the following best describes the structural deficit?

Accepted Answer

The deficit that remains at full employment.

Question 13

Suppose the consumption function is $$C = 100 + 0.75Y_d$$, investment $$I = 100$$, government spending $$G = 100$$, and net taxes $$T = 100. $$What is the equilibrium output ($$Y$$)?

Accepted Answer

$$Y = 900$$

Question 14

Which of the following is an example of fiscal drag?

Accepted Answer

Average tax rates increase because taxpayers move into higher income brackets during an expansion.

Question 15

If the marginal propensity to consume (MPC) is 0.9 and the government increases taxes by $$20$$ billion, what is the expected change in equilibrium output?

Accepted Answer

$$-20 	imes \frac{0.9}{1-0.9} = -180$$ billion

Question 16

Which of the following is NOT a component of planned aggregate expenditure ($$AE) in $$the government sector model?

Accepted Answer

Net exports ($$NX)$$

Question 17

If the government wants to increase equilibrium output without increasing the budget deficit, which fiscal policy should it use?

Accepted Answer

Increase both government spending and taxes by the same amount.

Question 18

Which of the following best describes the difference between the federal debt and the federal deficit?

Accepted Answer

The federal debt is the total amount owed by the government, while the deficit is the annual difference between spending and revenue.

Question 19

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

Accepted Answer

A tax system that reduces tax rates as income rises.

Chapter 24: The Government and Fiscal Policy – Macroeconomics Study Notes

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