Q: If the marginal propensity to consume (MPC) is 0.75, what is the effect on real GDP of a $100 billion tax cut?

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

Q: Suppose the government increases taxes by $50 billion and the MPC is 0.6. What is the expected change in real GDP?

$$50 \times -\frac{0.6}{1-0.6} = -75$$ billion

Question 1

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments that increase as more people lose jobs during a recession

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

If the government increases both its spending and taxes by $20 billion, and the MPC is 0.75, what is the expected change in real GDP according to the balanced budget multiplier?

Accepted Answer

$$20$$ billion

Question 4

Which of the following best describes the main goal of contractionary fiscal policy?

Accepted Answer

To reduce inflation by decreasing aggregate demand

Question 5

A $$100 billion increase in government purchases leads to a 300 $$billion increase in real GDP. What is the value of the government purchases multiplier?

Accepted Answer

$$3$$

Question 6

If the MPC is 0.6, what is the value of the tax multiplier?

Accepted Answer

$$-\frac{0.6}{1-0.6} = -1.5$$

Question 7

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

Accepted Answer

Congress passes a new law to increase infrastructure spending

Question 8

Suppose the government wants to close a recessionary gap of $200 billion. If the government purchases multiplier is 4, by how much should government purchases increase?

Accepted Answer

$$\frac{200}{4} = 50$$ billion

Question 9

Which of the following is NOT a limitation of using fiscal policy to stabilize the economy?

Accepted Answer

Immediate impact of monetary policy on aggregate demand

Question 10

If the government runs a budget deficit, which of the following must be true?

Accepted Answer

Government expenditures exceed tax revenues

Question 11

In the dynamic AD-AS model, what is the likely effect of an expansionary fiscal policy when the economy is initially at long-run equilibrium and a negative demand shock is expected?

Accepted Answer

It shifts aggregate demand rightward, helping maintain full employment

Question 12

Which of the following best describes the multiplier effect?

Accepted Answer

A series of induced increases in consumption spending resulting from an initial increase in autonomous spending

Question 13

If the marginal propensity to consume (MPC) is 0.75, what is the effect on real GDP of a $100 billion tax cut?

Accepted Answer

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

Question 14

Which of the following statements about the U.S. federal government debt is correct?

Accepted Answer

The debt is the total amount the government owes, while the deficit is the annual difference between expenditures and revenues

Question 15

Suppose the government increases taxes by $50 billion and the MPC is 0.6. What is the expected change in real GDP?

Accepted Answer

$$50 	imes -\frac{0.6}{1-0.6} = -75$$ billion

Question 16

Which of the following is a real-world example of countercyclical fiscal policy?

Accepted Answer

The government increases spending during a recession and reduces spending during an economic boom

Question 17

If the government wants to reduce inflationary pressure in an overheating economy, which fiscal policy action is most appropriate?

Accepted Answer

Decrease government purchases and/or increase taxes

Question 18

Which of the following best explains why the tax multiplier is smaller in absolute value than the government purchases multiplier?

Accepted Answer

A tax cut is only partially spent, while government purchases directly increase aggregate demand

Question 19

A country has a GDP of $$1 trillion and a government debt of 500 $$billion. Which statement is most accurate regarding its debt sustainability?

Accepted Answer

The country's ability to sustain its debt depends on its GDP and investors' confidence in repayment

Question 20

Which of the following is NOT considered fiscal policy?

Accepted Answer

A change in the federal funds rate by the central bank

Fiscal Policy: Principles, Mechanisms, and U.S. Government Budget

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