Q: Suppose the government increases its purchases by $100 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in GDP according to the government purchases multiplier formula?

$$\frac{1}{1-0.8} = 5$$, so $$100$$ million $$\times 5 = 500$$ million increase in GDP.

Question 1

Which of the following best describes an automatic stabilizer in fiscal policy?

Accepted Answer

A policy tool that automatically increases government spending or decreases taxes when the economy contracts, without new government action.

Question 2

Suppose the government increases its purchases by $100 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in GDP according to the government purchases multiplier formula?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$, so $$100$$ million $$	imes 5 = 500$$ million increase in GDP.

Question 3

Which of the following scenarios best illustrates the concept of 'crowding out'?

Accepted Answer

The government increases spending, leading to higher interest rates and reduced private investment.

Question 4

If the government enacts a $$50$$ million tax cut and the marginal propensity to consume (MPC) is $$0.75$$, what is the total change in GDP using the tax multiplier?

Accepted Answer

Tax multiplier $$= -\frac{MPC}{1-MPC} = -\frac{0.75}{0.25} = -3. So$$, $$-3 	imes (-50)$$ million $$= 150$$ million increase in GDP.

Question 5

Which of the following statements about the Phillips curve is correct?

Accepted Answer

The short-run Phillips curve shows an inverse relationship between inflation and unemployment.

Question 6

If actual unemployment is below the natural rate of unemployment, what is likely to happen to inflation according to the Phillips curve framework?

Accepted Answer

Inflation will accelerate.

Question 7

Suppose the government increases both spending and taxes by $$20$$ billion. If the marginal propensity to consume (MPC) is $$0.6$$, what is the balanced budget multiplier and the total change in GDP?

Accepted Answer

Balanced budget multiplier $$= 1$$, so GDP increases by $$20$$ billion.

Question 8

Which of the following best describes the Nonaccelerating Inflation Rate of Unemployment (NAIRU)?

Accepted Answer

The unemployment rate at which inflation does not change over time.

Question 9

If the expected inflation rate increases, what happens to the short-run Phillips curve?

Accepted Answer

It shifts upward.

Question 10

A country is experiencing a recession. Which combination of fiscal and monetary policy would be most effective in returning the economy to potential GDP?

Accepted Answer

Expansionary fiscal policy and expansionary monetary policy.

Question 11

Suppose the government runs a large budget deficit to stimulate the economy. According to the AD/AS model, what is a potential long-run consequence if the economy is already at full employment?

Accepted Answer

The price level will rise, leading to inflation.

Question 12

If nominal wages increase by 5% and the inflation rate is 3%, what is the percentage change in real wages?

Accepted Answer

Real wage change $$= 5\% - 3\% = 2\%$$ increase.

Question 13

Which of the following is an example of discretionary fiscal policy?

Accepted Answer

Congress passes a new infrastructure spending bill during a recession.

Question 14

If the marginal propensity to consume (MPC) is $$0.9$$, what is the value of the government purchases multiplier?

Accepted Answer

Multiplier $$= \frac{1}{1-0.9} = 10$$

Question 15

Which of the following would cause a rightward shift in the aggregate demand curve in the static AD/AS model?

Accepted Answer

An increase in government spending.

Question 16

If the economy is experiencing high inflation and low unemployment, which fiscal policy action is most appropriate?

Accepted Answer

Contractionary fiscal policy, such as reducing government spending or increasing taxes.

Question 17

Which of the following best explains why the long-run Phillips curve is vertical?

Accepted Answer

In the long run, unemployment returns to the natural rate regardless of the inflation rate.

Question 18

If the government increases taxes by $$40$$ million and the MPC is $$0.5$$, what is the expected change in GDP using the tax multiplier?

Accepted Answer

Tax multiplier $$= -\frac{0.5}{1-0.5} = -1$$, so GDP decreases by $$40$$ million.

Question 19

Which of the following would shift the short-run Phillips curve to the right?

Accepted Answer

An increase in expected inflation.

Question 20

If the government wants to use fiscal policy to reduce unemployment without causing inflation to accelerate, what should it aim for?

Accepted Answer

Reduce unemployment to the natural rate (NAIRU).

Fiscal Policy, Inflation, and Unemployment: Key Concepts and Applications

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