Q: Which of the following best describes the government budget balance formula?

$$\text{Budget Balance} = T - (G + TR)$$

Q: If the government increases transfer payments by $30 million, the MPC is 0.7, and there are no taxes or imports, what is the total change in real GDP?

$$30 \times \dfrac{0.7}{1 - 0.7} = 30 \times 2.33 = 69.9$$ million

Q: Suppose the government wants to close a recessionary gap of $100 billion. The MPC is 0.75 and there are no taxes or imports. By how much should government spending increase?

$$\text{Required increase} = \dfrac{100}{\dfrac{1}{1-0.75}} = \dfrac{100}{4} = 25$$ billion

Q: If the marginal propensity to consume (MPC) is 0.7 and the tax rate is 0.2, what is the spending multiplier with taxes?

$$\dfrac{1}{1 - (0.7 \times (1 - 0.2))} = \dfrac{1}{1 - 0.56} = \dfrac{1}{0.44} = 2.27$$

Question 1

Which of the following best describes the government budget balance formula?

Accepted Answer

$$	ext{Budget Balance} = T - (G + TR)$$

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8 and there are no taxes or imports. What is the value of the simple government spending multiplier?

Accepted Answer

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

Question 3

If the government increases transfer payments by $30 million, the MPC is 0.7, and there are no taxes or imports, what is the total change in real GDP?

Accepted Answer

$$30 	imes \dfrac{0.7}{1 - 0.7} = 30 	imes 2.33 = 69.9$$ million

Question 4

Which of the following is NOT an example of an automatic stabilizer?

Accepted Answer

A government program that requires a new law to increase spending during a recession

Question 5

If the marginal propensity to import (MPM) is 0.2 and the MPC is 0.6, what is the government spending multiplier when there are no taxes?

Accepted Answer

$$\dfrac{1}{1 - (0.6 - 0.2)} = \dfrac{1}{1 - 0.4} = \dfrac{1}{0.6} = 1.67$$

Question 6

A country has a debt-to-GDP ratio of 90%. Which of the following statements is most accurate?

Accepted Answer

The debt-to-GDP ratio measures the relative size of the debt compared to the country’s ability to repay it.

Question 7

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

Accepted Answer

It reduces aggregate demand by decreasing government spending or increasing taxes.

Question 8

Suppose the government wants to close a recessionary gap of $100 billion. The MPC is 0.75 and there are no taxes or imports. By how much should government spending increase?

Accepted Answer

$$	ext{Required increase} = \dfrac{100}{\dfrac{1}{1-0.75}} = \dfrac{100}{4} = 25$$ billion

Question 9

Which of the following is a potential problem with persistent government budget deficits?

Accepted Answer

They can lead to higher debt charges, reducing funds available for other government spending.

Question 10

If the marginal propensity to consume (MPC) is 0.7 and the tax rate is 0.2, what is the spending multiplier with taxes?

Accepted Answer

$$\dfrac{1}{1 - (0.7 	imes (1 - 0.2))} = \dfrac{1}{1 - 0.56} = \dfrac{1}{0.44} = 2.27$$

Question 11

Which of the following best explains why automatic stabilizers reduce the size of the multiplier?

Accepted Answer

They cause part of any increase in income to be taxed or saved, reducing induced consumption spending.

Question 12

Suppose the government increases spending by $40 million, the MPC is 0.6, and the marginal propensity to import (MPM) is 0.2. What is the total change in real GDP?

Accepted Answer

$$40 	imes \dfrac{1}{1 - (0.6 - 0.2)} = 40 	imes 1.67 = 66.8$$ million

Question 13

Which of the following is a recognition lag in discretionary fiscal policy?

Accepted Answer

The time it takes to identify that a problem such as a recession or inflation exists.

Question 14

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

Accepted Answer

Government spending plus transfers exceeds tax revenues.

Question 15

Which of the following is a likely effect of high government debt charges?

Accepted Answer

A larger portion of government spending is used to pay interest, reducing funds for other priorities.

Question 16

Suppose the MPC is 0.75, the tax rate is 0.2, and the marginal propensity to import (MPM) is 0.1. What is the government spending multiplier?

Accepted Answer

$$\dfrac{1}{1 - [0.75 	imes (1 - 0.2) - 0.1]} = \dfrac{1}{1 - [0.75 	imes 0.8 - 0.1]} = \dfrac{1}{1 - [0.6 - 0.1]} = \dfrac{1}{1 - 0.5} = 2$$

Question 17

Which of the following best describes crowding out?

Accepted Answer

Government borrowing increases interest rates, reducing private investment.

Question 18

If the government increases transfer payments by $50 million, the MPC is 0.8, and the tax rate is 0.25, what is the transfer payment multiplier?

Accepted Answer

$$\dfrac{0.8}{1 - 0.8 	imes (1 - 0.25)} = \dfrac{0.8}{1 - 0.8 	imes 0.75} = \dfrac{0.8}{1 - 0.6} = \dfrac{0.8}{0.4} = 2$$

Question 19

Which of the following is a reason why governments may not need to balance their budgets every year?

Accepted Answer

As long as the debt-to-GDP ratio is stable, governments have flexibility to respond to economic shocks.

Fiscal Policy: Government Budgets, Multipliers, and Policy Impacts

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