Q: If the government increases spending by $2$ billion and the expenditures multiplier is $4$, by how much will aggregate demand ($\Delta AD$) increase?

$\Delta AD = 4 \times 2 = 8$ billion

Q: Suppose the government decreases taxes by $3$ billion and the MPC is $0.75$. What is the total increase in aggregate demand ($\Delta AD$)?

$\Delta AD = Tax\ Multiplier \times \Delta T = -3 \times (-3) = 9$ billion

Question 1

Suppose the government wants to close a recessionary gap by increasing government purchases. If the marginal propensity to consume (MPC) is 0.8, what is the value of the expenditures multiplier?

Accepted Answer

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

Question 2

If the government increases spending by $2$ billion and the expenditures multiplier is $4$, by how much will aggregate demand ($\Delta AD$) increase?

Accepted Answer

$\Delta AD = 4 	imes 2 = 8$ billion

Question 3

Which of the following best describes contractionary fiscal policy?

Accepted Answer

Decreasing government purchases and/or increasing taxes to reduce aggregate demand and lower inflation

Question 4

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

Accepted Answer

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

Question 5

A decrease in investment spending causes the aggregate demand curve to shift to the left. Which fiscal policy could the government use to restore full employment?

Accepted Answer

Increase government purchases to shift aggregate demand right

Question 6

If the government wants to decrease aggregate demand by $5$ billion and the MPC is $0.8$, by how much should government purchases decrease?

Accepted Answer

$\Delta G = \frac{\Delta AD}{Multiplier} = \frac{5}{5} = 1$ billion

Question 7

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

Accepted Answer

Unemployment insurance payments that increase during a recession

Question 8

What is the formula for the expenditures multiplier?

Accepted Answer

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

Question 9

Suppose the government decreases taxes by $3$ billion and the MPC is $0.75$. What is the total increase in aggregate demand ($\Delta AD$)?

Accepted Answer

$\Delta AD = Tax\ Multiplier 	imes \Delta T = -3 	imes (-3) = 9$ billion

Question 10

Which of the following best describes the recognition lag in fiscal policy?

Accepted Answer

The time between when an event affects the economy and when it is recognized in the data

Question 11

If the aggregate supply is at full employment at $90$ billion and current output is $83$ billion, what is the recessionary gap?

Accepted Answer

$90 - 83 = 7$ billion

Question 12

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

Accepted Answer

It can instantly affect aggregate demand without any delay

Question 13

What is the effect of a progressive tax system on automatic stabilization?

Accepted Answer

It increases automatic stabilization because taxes rise as income rises

Question 14

Which equation correctly represents the change in aggregate demand due to a change in government expenditures?

Accepted Answer

$\Delta AD = Multiplier 	imes \Delta Expenditures$

Question 15

If the government wants to reduce inflation caused by excessive aggregate demand, which fiscal policy should it use?

Accepted Answer

Decrease government purchases and/or increase taxes

Question 16

Which of the following best describes the multiplier effect?

Accepted Answer

An additional dollar of expenditures results in the creation of more than one dollar's worth of real GDP

Question 17

Which formula correctly calculates disposable income?

Accepted Answer

$Disposable\ Income = Income(Y) - Taxes(T) + Transfers(TR)$

Question 18

If the MPC is $0.6$, by how much must taxes decrease to increase aggregate demand by $6$ billion?

Accepted Answer

$Tax\ Multiplier = -\frac{MPC}{1-MPC} = -\frac{0.6}{0.4} = -1.5$; $\Delta T = \frac{6}{-1.5} = -4$ billion

Question 19

Which of the following is a transfer payment?

Accepted Answer

Unemployment benefits paid to households

Question 20

Which type of inflation occurs due to an increase in aggregate demand?

Accepted Answer

Demand-pull inflation

Fiscal Policy, Aggregate Demand, and the Multiplier in Macroeconomics

Study Guide - Practice Questions

Study Guide - Flashcards