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

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

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 3

Suppose the government increases its purchases by $50 billion and the marginal propensity to consume (MPC) is 0.8. What is the total change in equilibrium real GDP, assuming no taxes or imports?

Accepted Answer

$250 billion

Question 4

Which of the following best describes the effect of contractionary fiscal policy?

Accepted Answer

It decreases government purchases or increases taxes to reduce inflationary pressures.

Question 5

If the government enacts a $20 billion tax cut and the MPC is 0.75, what is the expected change in equilibrium real GDP?

Accepted Answer

$60 billion increase

Question 6

Which of the following equations correctly represents the government purchases multiplier?

Accepted Answer

$$\frac{1}{1 - MPC}$$

Question 7

In the dynamic aggregate demand and aggregate supply model, what is the likely short-run effect of an expansionary fiscal policy?

Accepted Answer

An increase in real GDP and a higher price level compared to no policy action.

Question 8

Which of the following is true about the tax multiplier?

Accepted Answer

It is always a negative number and smaller in absolute value than the government purchases multiplier.

Question 9

Suppose the government increases both government purchases and taxes by $10 billion. What is the short-run effect on real GDP according to the balanced budget multiplier?

Accepted Answer

Real GDP increases by $10 billion.

Question 10

If the marginal propensity to consume (MPC) is 0.75, the tax rate is 0.2, and the marginal propensity to import (MPI) is 0.1, what is the government purchases multiplier?

Accepted Answer

$$\frac{1}{1 - 0.75(1 - 0.2) - 0.1} = 2$$

Question 11

Which of the following is NOT a component of federal government expenditures?

Accepted Answer

Corporate income taxes

Question 12

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 household spending, helping to stabilize real GDP

Question 13

Which of the following best describes the multiplier effect?

Accepted Answer

The process by which a change in autonomous expenditure leads to a larger change in real GDP.

Question 14

If the marginal propensity to consume (MPC) increases, what happens to the government purchases multiplier?

Accepted Answer

It increases.

Question 15

Which of the following is a likely long-run effect of a permanent increase in government purchases, according to macroeconomic theory?

Accepted Answer

Crowding out of private consumption and/or investment.

Question 16

Suppose the government increases transfer payments by $30 billion and the MPC is 0.6. What is the expected total increase in equilibrium real GDP?

Accepted Answer

$75 billion

Question 17

Which of the following best explains why the government purchases multiplier is smaller in an open economy?

Accepted Answer

Because some of the increase in income is spent on imports, which do not contribute to domestic GDP.

Question 18

If the government wants to reduce inflation without causing a recession, which fiscal policy action is most appropriate?

Accepted Answer

Decrease government purchases or increase taxes.

Question 19

Which of the following is the correct formula for the tax multiplier?

Accepted Answer

$$\frac{-MPC}{1 - MPC}$$

Question 20

A country has an MPC of 0.7, a tax rate of 0.1, and an MPI of 0.2. What is the government purchases multiplier?

Accepted Answer

$$\frac{1}{1 - 0.7(1 - 0.1) - 0.2}$$

Fiscal Policy and Its Macroeconomic Effects

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