Question 1

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75,they should increase government purchases of goods and services by $75 billion.

Accepted Answer

The answer of If policy makers want to increase real...

Question 2

Real GDP equals $400 billion,the government collects 25% of any increase in real GDP in the form of taxes,and the marginal propensity to consume is 0.8.If potential output equals $250 billion,the government could close the _____ gap by decreasing government spending by _____.

Accepted Answer

The answer of Real GDP equals $400 billion,the government collects...

Question 3

If the marginal propensity to consume is 0.80,the multiplier for government purchases of goods and services will be 1.25.

Accepted Answer

The answer of If the marginal propensity to consume is...

Question 4

Increased government transfers constitute contractionary fiscal policy.

Accepted Answer

Increased government transfers, such as welfare or unemployment benefits, typically stimulate consumption and aggregate demand, thereby constituting expansionary fiscal policy.

Question 5

Real GDP equals $400 billion,the government collects 25% of any increase in real GDP in the form of taxes,and the marginal propensity to consume is 0.8.If the government decreases spending by $40 billion,real GDP will decrease by:

Accepted Answer

If real GDP equals $400 billion, and the government collects 25% of any increase in real GDP in the form of taxes, then if real GDP decreases by $40 billion, the government's revenue from taxes will decrease by 25% of $40 billion, which is $10 billion.

The marginal propensity to consume (MPC) is 0.8, which means that for every additional dollar of income, individuals will spend 80 cents and save 20 cents. If the government decreases spending by $40 billion, this will decrease aggregate demand in the economy, leading to a decrease in real GDP.

The multiplier can be calculated as 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, a decrease in government spending of $40 billion will lead to a decrease in real GDP of $40 billion multiplied by the multiplier of 5, which is $200 billion.

Therefore, the total decrease in real GDP will be the sum of the decrease in government spending ($40 billion) and the decrease in consumer spending due to the multiplier effect ($200 billion), which is $240 billion.

Question 6

The marginal propensity to consume is the percentage of a household's income that is used to pay income tax.

Accepted Answer

The marginal propensity to consume (MPC) is the percentage of an additional dollar of income that a household spends on consumption. It is not related to income tax payments.

Question 7

A change in taxes shifts the aggregate demand curve by less than a change in government spending for goods and services and has a smaller effect on real GDP.

Accepted Answer

This is because a change in taxes affects disposable income and consumption, which are only a part of aggregate demand. On the other hand, a change in government spending directly affects the overall level of aggregate demand. Therefore, a change in government spending has a larger impact on real GDP.

Question 8

The Economic Action Plan was aimed at closing a recessionary gap.

Accepted Answer

The Economic Action Plan was implemented by the Canadian government in response to the 2008-2009 global financial crisis with the goal of stimulating economic growth and closing the recessionary gap.

Question 9

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6,they should decrease government purchases of goods and services by $40 billion.

Accepted Answer

The answer of If policy makers want to decrease real...

Question 10

One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap.

Accepted Answer

Fiscal policy decisions are often made by government officials who rely on economic indicators like GDP, unemployment rate, and inflation rate to assess whether the economy is facing a recessionary or inflationary gap. However, it takes time for this data to be collected and analyzed, so there is a lag between when the economy started to slow down or pick up speed and when policymakers are able to respond with appropriate fiscal measures. This lag can be a disadvantage of fiscal policy since the economy may have already adjusted to the changing conditions by the time the government takes action.

Question 11

Expansionary fiscal policy pushes the aggregate demand curve to the right.

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes, which leads to an increase in consumer and government spending. This increased spending leads to an increase in aggregate demand, which shifts the aggregate demand curve to the right.

Question 12

In Canada,social insurance programmes are paid for largely with special,dedicated taxes on wages.

Accepted Answer

In Canada, social insurance programs such as unemployment insurance, workers' compensation, and the Canada Pension Plan are funded by payroll taxes that are directly deducted from an individual's earnings. Therefore, social insurance programs are largely paid for by dedicated taxes on wages.

Question 13

Fiscal policy is the use of taxes,government transfers,or government purchases to shift the aggregate demand curve.

Accepted Answer

Fiscal policy involves using government expenditures, taxes, and transfers to influence the economy by shifting aggregate demand. This can be used to help control inflation or stimulate economic growth.

Question 14

The 2009 Canadian stimulus plan was an expansionary fiscal policy that increased aggregate demand.

Accepted Answer

The Canadian stimulus plan of 2009 involved increasing government spending and cutting taxes, which both contribute to increasing aggregate demand. Therefore, it was an expansionary fiscal policy.

Question 15

An increase in government spending for goods and services is an autonomous increase in aggregate demand.

Accepted Answer

An increase in government spending for goods and services is a form of government expenditure, which adds directly to the aggregate demand in the economy, making it an example of an autonomous increase in aggregate demand.

Question 16

The size of the multiplier increases as the size of the marginal propensity to consume increases.

Accepted Answer

The marginal propensity to consume is the fraction of additional income that is spent on consumption. As this fraction increases, more of each additional dollar earned is spent, creating a larger impact on overall spending and increasing the size of the multiplier.

Question 17

Some economists argue that when a government tries too hard to stabilize the economy through fiscal or monetary policy,it can end up making the economy less stable.

Accepted Answer

This is known as the "policy uncertainty hypothesis," and it suggests that unpredictable or inconsistent government policies can create uncertainty in the private sector, leading to reduced investment, slower economic growth, and increased economic volatility.

Question 18

A change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP.

Accepted Answer

The answer of A change in government transfers shifts the...

Question 19

When faced with a recessionary gap,the government can increase taxes and cut spending to close it.

Accepted Answer

When faced with a recessionary gap, the government typically takes expansionary fiscal policies such as increasing government spending and cutting taxes to close the gap. Decreasing spending and increasing taxes would be contractionary fiscal policies, which would further worsen the recessionary gap.

Question 20

If the marginal propensity to consume is 0.8 and government purchases of goods and services decrease by $30 billion,real GDP will decrease by $24 billion.

Accepted Answer

The formula to calculate the change in real GDP due to a change in government purchases is:

Change in Real GDP = - MPC x Change in Government Purchases

In this case, the MPC is 0.8 and the change in government purchases is -$30 billion. Substituting these values into the formula:

Change in Real GDP = -0.8 x (-$30 billion) = $24 billion

However, the question asks for the decrease in real GDP, not the absolute change. Since government purchases are decreasing, real GDP must also be decreasing. Therefore, the answer should be:

Answer: A

Quiz 13: Fiscal Policy