Question 1

Other things equal, the multiplier effect of a change in government spending is:

Accepted Answer

The multiplier effect of a change in government spending is the same as the multiplier effect of a change in investment or in autonomous consumption because all these factors directly affect aggregate demand in a similar manner, leading to a multiplied effect on the economy through the spending cycle.

Question 2

If the MPC is 0.8, the net income tax rate is 0.2, the marginal propensity to import is 0.04 and the autonomous taxes decrease by $100 million, then we would expect GDP to increase by:

Accepted Answer

The answer of If the MPC is 0.8, the net...

Question 3

If the MPC is 0.8, the net income tax rate is 0.2, the marginal propensity to import is 0.04, government expenditure increase by $100 million and the autonomous taxes increase by $100 million, then we would expect GDP to increase by:

Accepted Answer

The answer of If the MPC is 0.8, the net...

Question 4

Suppose, the autonomous government expenditure multiplier is 2.5 and the autonomous tax multiplier is -2. Therefore, the balanced budget multiplier is:

Accepted Answer

The balanced budget multiplier is calculated as the sum of the autonomous government expenditure multiplier and the autonomous tax multiplier. In this case, 2.5 (government expenditure multiplier) + (-2) (tax multiplier) = 0.5.

Question 5

Suppose that the government increases its spending by 10 per cent and also increases it autonomous taxes by 10 per cent. We would expect this to:

Accepted Answer

Increasing government spending directly injects money into the economy, boosting demand and potentially increasing national income. Raising autonomous taxes could potentially offset some of this effect by reducing disposable income and consumption. However, the immediate impact of increased government spending is typically more direct and potent in stimulating economic activity compared to the dampening effect of higher taxes, leading to an overall expansionary effect on national income.

Question 6

The government budget balance (BB) is:

Accepted Answer

The answer of The government budget balance (BB) is:
...

Question 7

GDP, the tax rate, autonomous taxes, transfer payments and government spending and the level of output together determine:

Accepted Answer

GDP, the tax rate, autonomous taxes, transfer payments, government spending, and the level of output are all factors that directly influence the government budget balance. These elements affect both the revenue (through taxes and other receipts) and the expenditure side of the government budget, thereby determining whether the government runs a surplus, deficit, or balanced budget.

Question 8

-Refer to Figure 7.4. NT is tax revenues and G is government expenditures. All figures are in billions. In this economy:

Accepted Answer

Tax revenues vary directly with GDP because they increase as GDP increases, indicating a direct relationship. Government spending (G) is shown as a constant amount, indicating it does not change with changes in GDP, thus it is independent of GDP.

Question 9

-Refer to Figure 7.4. The diagram shows that:

Accepted Answer

At low levels of income, government revenue (mainly from taxes) decreases because people and businesses earn less and therefore pay less in taxes. However, government spending may not decrease correspondingly, leading to a budget deficit where government expenditures exceed revenue.

Question 10

Consider leakages and injections in an open economy with government sector. Which of the following equations is incorrect?

Accepted Answer

The equation D is incorrect because it incorrectly represents the relationship between savings, net taxes, government spending, investment, exports, and imports. The correct equation should have imports (Z) subtracted from exports (X) to represent net exports, as shown in equation C.

Question 11

Consider leakages and injections in an open economy with government sector. Select the incorrect equation from the following:

Accepted Answer

Option C is incorrect because it improperly combines the components of the economy. The correct relationship should account for government spending and net taxes as leakages or injections properly, and not mix them in a way that doesn't reflect their actual impact on the economy's circular flow.

Question 12

Which of the following statements is false?

Accepted Answer

Statement B is false because an economy's investment can indeed be less than the economy's savings. This situation typically occurs when there is a surplus of savings that is not being fully utilized for investment within the economy, leading to potential investment in foreign markets or other external uses of the excess savings.

Question 13

Government actions to change its budget in order to change AE and keep GDP close to its potential level is called:

Accepted Answer

Stabilization policy refers to government actions, including fiscal measures like adjusting its budget, to stabilize the economy by influencing aggregate expenditure (AE) and keeping GDP close to its potential level. Running a deficit, a budget surplus, and monetary policy are tools or outcomes of broader economic policies, not specifically the actions to adjust AE for stabilizing GDP.

Question 14

Government may be able to increase equilibrium real GDP and reduce the unemployment rate by:

Accepted Answer

All the options listed can potentially increase equilibrium real GDP and reduce the unemployment rate. A) Increasing government purchases directly increases aggregate demand. B) Cutting taxes increases disposable income, leading to higher consumption and investment. C) Increasing both purchases and taxes by the same amount can still stimulate the economy if the multiplier effect of government spending is larger than the multiplier effect of taxes.

Question 15

Recession-fighting policies can be handled most easily by the:

Accepted Answer

The government sector is most capable of implementing recession-fighting policies through tools such as fiscal policy (adjusting government spending and taxation) and monetary policy (controlling the money supply and interest rates). These mechanisms allow the government to influence economic activity and stabilize the economy during recessions.

Question 16

Expansionary fiscal policy:

Accepted Answer

Expansionary fiscal policy is aimed at increasing aggregate demand through either a decrease in taxes or an increase in government spending, which in turn can lead to an increase in equilibrium GDP.

Question 17

Tightening fiscal policy during a recession is likely to _______ equilibrium real GDP.

Accepted Answer

Tightening fiscal policy, which involves reducing government spending or increasing taxes, typically reduces aggregate demand. This, in turn, can lead to a decrease in equilibrium real GDP, especially during a recession when the economy is already underperforming.

Question 18

Suppose that the government cuts taxes and reduces its revenues by $20 million. We would expect the aggregate expenditure curve to:

Accepted Answer

The answer of Suppose that the government cuts taxes and...

Question 19

Budget policy is government policy on:

Accepted Answer

Budget policy, often referred to as fiscal policy, involves government decisions on spending and taxation. It is a primary tool for managing the economy, influencing demand, and addressing issues like unemployment or inflation through adjustments in government expenditures and tax rates.

Question 20

To the economist, the term fiscal policy refers to:

Accepted Answer

Fiscal policy involves government decisions on taxation and spending to influence the economy, particularly aggregate demand and the level of economic activity.

Quiz 7: The Government Sector