Q: Suppose the government increases its spending by $100 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple spending multiplier formula?

$$\frac{1}{1-0.8} \times 100\ \text{billion} = 5 \times 100\ \text{billion} = 500\ \text{billion}$$

Q: Suppose the government increases taxes by $50 billion and the MPC is 0.75. What is the expected change in real GDP using the tax multiplier formula?

$$\frac{-0.75}{1-0.75} \times 50\ \text{billion} = -3 \times 50\ \text{billion} = -150\ \text{billion}$$

Question 1

Which of the following best describes fiscal policy?

Accepted Answer

The use of government spending and taxation to influence the economy.

Question 2

Suppose the government increases its spending by $100 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple spending multiplier formula?

Accepted Answer

$$\frac{1}{1-0.8} 	imes 100\ 	ext{billion} = 5 	imes 100\ 	ext{billion} = 500\ 	ext{billion}$$

Question 3

Which of the following is a limitation of using fiscal policy to stabilize the economy?

Accepted Answer

There are significant time lags between recognizing a problem and implementing policy.

Question 4

If the government runs a budget deficit for several consecutive years, which of the following is most likely to occur?

Accepted Answer

The federal government debt will increase.

Question 5

Which of the following best explains the concept of the fiscal multiplier working in both directions?

Accepted Answer

An increase in government spending increases GDP, while a decrease in spending decreases GDP by a multiple of the initial change.

Question 6

Which of the following is NOT a likely long-run effect of persistent government budget deficits?

Accepted Answer

A permanent reduction in the money supply.

Question 7

Suppose the government increases taxes by $50 billion and the MPC is 0.75. What is the expected change in real GDP using the tax multiplier formula?

Accepted Answer

$$\frac{-0.75}{1-0.75} 	imes 50\ 	ext{billion} = -3 	imes 50\ 	ext{billion} = -150\ 	ext{billion}$$

Question 8

Which of the following best describes the relationship between fiscal policy and economic growth in the long run?

Accepted Answer

Fiscal policy can promote long-run growth if it is used to finance productive investments such as infrastructure and education.

Question 9

Which of the following is an example of a government policy that restricts international trade?

Accepted Answer

Imposing tariffs on imported goods.

Question 10

Country A can produce either 10 units of wine or 20 units of cheese per day. Country B can produce either 8 units of wine or 16 units of cheese per day. Which country has the comparative advantage in producing wine?

Accepted Answer

Country B, because it has a lower opportunity cost of producing wine.

Question 11

Which of the following statements best explains how countries gain from international trade?

Accepted Answer

By specializing in the production of goods for which they have a comparative advantage and trading for other goods.

Question 12

Which of the following is a common argument in the debate over globalization and trade policies?

Accepted Answer

Globalization can lead to job losses in industries that face increased foreign competition.

Question 13

If the U.S. imposes a quota on imported steel, what is the most likely short-term effect on the domestic price of steel?

Accepted Answer

The domestic price of steel will increase.

Question 14

Which of the following best describes the concept of opportunity cost in the context of comparative advantage?

Accepted Answer

The amount of one good that must be given up to produce an additional unit of another good.

Question 15

Suppose the U.S. government increases both government spending and taxes by $200 billion. If the MPC is 0.6, what is the expected effect on real GDP?

Accepted Answer

Real GDP will increase by $$\left[ \frac{1}{1-0.6} - \frac{0.6}{1-0.6} ight] 	imes 200\ 	ext{billion} = (2.5 - 1.5) 	imes 200 = 1 	imes 200 = 200\ 	ext{billion}$$

Question 16

Which of the following is a potential negative effect of high government debt on future economic growth?

Accepted Answer

High debt may lead to higher interest rates, which can crowd out private investment.

Question 17

If the U.S. dollar appreciates relative to other currencies, what is the likely effect on U.S. exports and imports?

Accepted Answer

U.S. exports will decrease and imports will increase.

Question 18

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 19

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

Accepted Answer

It decreases aggregate demand, leading to lower real GDP and possibly lower price levels.

Question 20

Which of the following is a likely result if a country imposes high tariffs on imported goods?

Accepted Answer

Domestic consumers pay higher prices for goods.

Fiscal Policy and International Trade: Key Concepts and Applications

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