Q: Suppose the marginal propensity to consume (MPC) is 0.8. If the government increases spending by $$100, what is the total change in equilibrium output ($$\Delta Y$) using the government spending multiplier?

$$\Delta Y = 100 \times \frac{1}{1 - 0.8} = 500$$

Question 1

Which of the following best describes the government spending multiplier, and how is it calculated?

Accepted Answer

It is the ratio of the change in equilibrium output to a change in government spending, calculated as $$\frac{1}{1 - MPC}.$$

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8. If the government increases spending by $$100, what is the total change in equilibrium output ($$\Delta Y$) using the government spending multiplier?

Accepted Answer

$$\Delta Y = 100 	imes \frac{1}{1 - 0.8} = 500$$

Question 3

Which of the following is an example of an automatic stabilizer in the federal budget?

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 4

If net taxes (T) are $$200$$ and total income (Y) is $$1,000$$, what is disposable income ($$Y_d$$)?

Accepted Answer

$$Y_d = Y - T = 1,000 - 200 = 800$$

Question 5

Which equation correctly represents equilibrium output in an economy with government?

Accepted Answer

$$Y = C + I + G$$

Question 6

If the marginal propensity to consume (MPC) is 0.75, what is the value of the tax multiplier?

Accepted Answer

$$-\frac{MPC}{1 - MPC} = -\frac{0.75}{0.25} = -3$$

Question 7

A government runs a budget deficit when:

Accepted Answer

Government spending ($$G) $$exceeds net taxes ($$T$$): $$G \u003e T$$

Question 8

Which of the following best explains why the multiplier is smaller when taxes depend on income?

Accepted Answer

Because as income rises, taxes automatically increase, reducing the impact of any initial spending increase.

Question 9

If the government increases both spending and taxes by $$\Delta G = \Delta T = 200$$, what is the expected change in equilibrium output according to the balanced-budget multiplier?

Accepted Answer

$$\Delta Y = \Delta G = 200$$

Question 10

Which of the following is NOT a discretionary fiscal policy?

Accepted Answer

An increase in unemployment benefits due to a rise in unemployment.

Question 11

Suppose the consumption function is $$C = 100 + 0.75(Y - T)$$, planned investment $$I = 100$$, government purchases $$G = 100$$, and net taxes $$T = 100. $$What is the equilibrium level of output ($$Y$$)?

Accepted Answer

$$Y = 900$$

Question 12

Which of the following best describes the concept of fiscal drag?

Accepted Answer

The negative effect on the economy when average tax rates increase as taxpayers move into higher income brackets during an expansion.

Question 13

If the marginal propensity to save (MPS) is 0.2, what is the value of the government spending multiplier?

Accepted Answer

$$\frac{1}{MPS} = \frac{1}{0.2} = 5$$

Question 14

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

Accepted Answer

The federal budget is the product of social, political, and economic forces.

Question 15

Which of the following best describes the difference between the structural deficit and the cyclical deficit?

Accepted Answer

The structural deficit remains at full employment, while the cyclical deficit occurs due to downturns in the business cycle.

Question 16

If taxes are a function of income, such as $$T = 200 + 0.3Y$$, how does this affect the aggregate expenditure function compared to lump-sum taxes?

Accepted Answer

The aggregate expenditure function becomes flatter, reducing the multiplier effect.

Question 17

Which of the following is an example of a balanced-budget fiscal policy action?

Accepted Answer

Increasing government spending and taxes by the same amount.

Question 18

Which of the following best describes the saving/investment approach to equilibrium in an economy with government?

Accepted Answer

$$S + T = I + G$$

Question 19

Which of the following is NOT included in planned aggregate expenditure ($$AE$$)?

Accepted Answer

Transfer payments

Chapter 9: The Government and Fiscal Policy – Principles of Macroeconomics Study Notes

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