Question 1

The formula to compute the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. This formula shows the multiple by which an initial change in spending will impact the overall economy. Option B correctly represents this formula.

Question 2

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC)is 0.90, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should:

Accepted Answer

The answer of Assume the economy is in recession and...

Question 3

As the marginal propensity to consume (MPC)decreases, the spending multiplier:

Accepted Answer

The spending multiplier is given by the formula 1/(1-MPC). As MPC decreases, the denominator (1-MPC) increases, which in turn decreases the value of the multiplier. Therefore, as MPC decreases, the spending multiplier decreases.

Question 4

If the marginal propensity to consume (MPC)is 0.50, the value of the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as 1/MPC. Since MPC is given as 0.50, the spending multiplier would be 1/0.50, which equals 2. Therefore, the answer is C) 2.

Question 5

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC)is 0.75, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should:

Accepted Answer

The answer of Assume the economy is in recession and...

Question 6

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC)is 0.50, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should:

Accepted Answer

The answer of Assume the economy is in recession and...

Question 7

Assume the marginal propensity to consume (MPC)is 0.75 and the economy is in recession with real GDP $1 trillion below full-employment real GDP. To achieve full employment, aggregate demand (AD)must be increased $2 trillion. Following discretionary fiscal policy, government spending should be increased:

Accepted Answer

The answer of Assume the marginal propensity to consume (MPC)is...

Question 8

If the marginal propensity to save (MPS)is 0.50, the value of the spending multiplier is:

Accepted Answer

The spending multiplier (SM) is calculated as 1/MPS. Therefore, if MPS = 0.50, 1/MPS = 2. This means that for every $1 increase in spending, it will ultimately lead to a $2 increase in aggregate demand due to the multiplier effect.

Question 9

The ratio of the change in GDP to an initial change in aggregate spending is the:

Accepted Answer

The ratio of the change in GDP to an initial change in aggregate spending is the spending multiplier. It represents the amount by which GDP increases for each unit increase in spending.

Question 10

If the marginal propensity to consume (MPC)is 0.96, the value of the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), so with an MPC of 0.96, the multiplier is 1/(1-0.96) = 1/0.04 = 25.

Question 11

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

Accepted Answer

When the economy is in a recession, there is a decrease in aggregate demand. To combat this, the government can increase government spending, which can stimulate aggregate demand and lead to economic growth. This also helps to create jobs and increase consumer confidence, which can further boost the economy. Therefore, increased government spending would be an appropriate discretionary fiscal policy to use when the economy is in a recession. Higher taxes and balanced-budget reduction in both spending and taxes can decrease aggregate demand which is contra-inducive to the situation. An expansion in the money supply is a monetary policy tool, not a fiscal policy tool.

Question 12

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

Accepted Answer

The answer of Assume that we want to drive our...

Question 13

When households' marginal propensity to consume (MPC)increases, the size of the spending multiplier:

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), which means that as MPC increases, the denominator (1-MPC) gets smaller, leading to a larger multiplier. Therefore, when households' MPC increases, the size of the spending multiplier also increases.

Question 14

If the marginal propensity to save (MPS)is 0.25, the value of the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as 1/MPS. If the MPS is 0.25, then the spending multiplier is 1/0.25 = 4. Therefore, the correct answer is C.

Question 15

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.80) = 5. To increase real GDP by $200 million, the government spending change required is $200 million divided by the multiplier, which is $200 million / 5 = $40 million.

Question 16

To combat a recession, Keynesian fiscal policy recommends:

Accepted Answer

Keynesian fiscal policy suggests increasing government spending to stimulate demand and economic activity during a recession.

Question 17

If the marginal propensity to consume (MPC)is 0.75, the value of the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as 1/MPC. Therefore, if MPC is 0.75, the spending multiplier would be 1/0.75 = 4. This means that for every $1 increase in government spending or investment, total spending in the economy will increase by $4.

Question 18

If the marginal propensity to save (MPS)is 0.10, the value of the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as the inverse of the MPS, or 1/MPS. Therefore, if the MPS is 0.10, the spending multiplier is 1/0.10 = 10.

Question 19

If the marginal propensity to consume (MPC)is 0.80, the value of the spending multiplier is:

Accepted Answer

The spending multiplier is calculated as 1/MPC. Therefore, 1/0.80 = 1.25. This means that for every $1 increase in spending, GDP will increase by $1.25. To find the total impact on GDP, we can multiply the initial $1 increase in spending by the spending multiplier of 1.25, giving a total increase in GDP of $1.25. Based on this calculation, the best choice is B.

Question 20

As the marginal propensity to consume (MPC)increases, the spending multiplier:

Accepted Answer

The spending multiplier is the result of dividing 1 by the marginal propensity to save (MPS). As the MPC increases, the MPS decreases, which means that the value of the denominator in the spending multiplier calculation is getting smaller. This results in a larger value for the spending multiplier, indicating that a given increase in spending will have a larger overall impact on the economy. Therefore, as the MPC increases, the spending multiplier also increases.

Quiz 11: Fiscal Policy

The formula to compute the spending multiplier is:

As the marginal propensity to consume (MPC) decreases, the spending multiplier:

If the marginal propensity to consume (MPC) is 0.50, the value of the spending multiplier is:

If the marginal propensity to save (MPS) is 0.50, the value of the spending multiplier is:

The ratio of the change in GDP to an initial change in aggregate spending is the:

If the marginal propensity to consume (MPC) is 0.96, the value of the spending multiplier is:

Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier:

If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is:

If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP?

To combat a recession, Keynesian fiscal policy recommends:

If the marginal propensity to consume (MPC) is 0.75, the value of the spending multiplier is:

If the marginal propensity to save (MPS) is 0.10, the value of the spending multiplier is:

If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier is:

As the marginal propensity to consume (MPC) increases, the spending multiplier: