Question 1

Which of the following best defines fiscal policy?

Accepted Answer

Changes in federal taxes and purchases intended to achieve macroeconomic policy objectives.

Question 2

Suppose the government increases its purchases by $20 billion and the marginal propensity to consume (MPC) is 0.75. What is the total change in equilibrium real GDP, assuming no taxes or imports?

Accepted Answer

$100 billion

Question 3

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

Accepted Answer

Employment insurance payments that increase during a recession.

Question 4

If the government enacts a contractionary fiscal policy, which of the following is most likely to occur in the short run?

Accepted Answer

Aggregate demand decreases, lowering real GDP and reducing inflation.

Question 5

What is the formula for the government purchases multiplier when the marginal propensity to consume is $$MPC$$?

Accepted Answer

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

Question 6

Which of the following best describes the concept of 'crowding out'?

Accepted Answer

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

Question 7

If the marginal propensity to consume (MPC) is 0.8 and the marginal propensity to import (MPI) is 0.1, what is the government purchases multiplier in an open economy?

Accepted Answer

$$\frac{1}{1-0.8+0.1}$$

Question 8

Which of the following statements about the tax multiplier is correct?

Accepted Answer

It is always negative because tax increases reduce equilibrium real GDP.

Question 9

During the COVID-19 pandemic, the Canadian government introduced the CERB and wage subsidy programs. What was a direct macroeconomic consequence of these programs?

Accepted Answer

A significant increase in government spending and the federal deficit.

Question 10

Which of the following is NOT a limitation of fiscal policy as a stimulus?

Accepted Answer

Immediate and precise impact on aggregate demand.

Question 11

Suppose the government increases both spending and taxes by $10 billion. If the marginal propensity to consume is 0.8, what is the balanced budget multiplier?

Accepted Answer

$$1$$

Question 12

Which of the following best describes the difference between a budget deficit and government debt?

Accepted Answer

A budget deficit is the annual shortfall of revenue relative to expenditures, while debt is the accumulation of past deficits.

Question 13

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

Accepted Answer

Reducing tax rates to increase incentives to work, save, and invest.

Question 14

If the government wants to use fiscal policy to reduce high inflation, which action should it take?

Accepted Answer

Decrease government purchases or increase taxes.

Question 15

Which of the following is true about the effectiveness of fiscal policy in the long run?

Accepted Answer

The government purchases and tax multipliers are zero in the long run.

Question 16

What is the main source of federal government revenue in Canada, according to the slides?

Accepted Answer

Personal income taxes

Question 17

Which of the following would increase the size of the government purchases multiplier?

Accepted Answer

A lower tax rate

Question 18

Why might a government choose not to balance its budget during a recession?

Accepted Answer

Balancing the budget would require cutting spending or raising taxes, which could worsen the recession.

Question 19

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 partially spent and partially saved, while government purchases directly increase spending.

Question 20

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

Accepted Answer

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

Fiscal Policy: Effects, Mechanisms, and Limitations (Chapter 12 Study Notes)

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