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

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

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

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

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 4

If the government increases both purchases and taxes by $20 billion, and the MPC is 0.75, what is the short-run effect on real GDP?

Accepted Answer

Real GDP increases by $20 billion.

Question 5

Which of the following best describes the crowding out effect?

Accepted Answer

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

Question 6

During the Covid-19 recession, the U.S. government enacted a large expansionary fiscal policy. What was one short-term consequence of this action?

Accepted Answer

An increase in household spending and a rise in inflation.

Question 7

If the marginal propensity to import (MPI) increases, what happens to the government purchases multiplier in an open economy?

Accepted Answer

The multiplier decreases because more spending leaks out as imports.

Question 8

Which of the following is NOT a reason why fiscal policy may be less effective than monetary policy for stabilizing the economy?

Accepted Answer

Immediate effect on aggregate demand with no time lags.

Question 9

Suppose the government enacts a $100 billion tax cut. If the MPC is 0.75, what is the total change in equilibrium real GDP?

Accepted Answer

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

Question 10

Which of the following best describes a tax wedge?

Accepted Answer

The difference between the pretax and posttax return to an economic activity.

Question 11

Which of the following is a long-run effect of persistent government budget deficits?

Accepted Answer

Potential crowding out of private investment, reducing long-term economic growth.

Question 12

If the government increases transfer payments, what is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand increases due to higher household disposable income and consumption.

Question 13

Which of the following statements about the federal budget deficit is correct?

Accepted Answer

A budget deficit occurs when government expenditures are greater than tax revenue.

Question 14

Which of the following policies is most likely to increase long-run economic growth?

Accepted Answer

A reduction in marginal tax rates to increase incentives to work, save, and invest.

Question 15

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

Accepted Answer

$$\frac{1}{1-0.75(1-0.2)} = 2.86$$

Question 16

Which of the following is a plausible reason why the 2007–2009 recession was so severe?

Accepted Answer

It was caused by a financial crisis, which tends to make recessions deeper and longer.

Question 17

Which of the following is NOT a source of federal government revenue?

Accepted Answer

State sales taxes

Question 18

What is the main reason that the tax multiplier is smaller (in absolute value) than the government purchases multiplier?

Accepted Answer

A tax cut is partially saved, so the initial impact on spending is less than a direct government purchase.

Question 19

Which of the following best describes the effect of a simplified tax code on economic efficiency?

Accepted Answer

It increases economic efficiency by reducing the number of decisions made solely to minimize taxes.

Question 20

If the government finances a budget deficit by selling Treasury securities, what is the immediate effect on the national debt?

Accepted Answer

The national debt increases.

Chapter 16: Fiscal Policy – Macroeconomics Study Notes

Study Guide - Practice Questions