Question 1

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6,they should increase taxes by more than $40 billion.

Accepted Answer

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Question 2

Taxes increase as GDP rises.This is an example of an automatic stabilizer.

Accepted Answer

Automatic stabilizers are government programs or policies that automatically adjust to changes in the economy without additional government action. One such example is the progressive taxation system, where taxes increase as GDP and incomes rise. This helps to stabilize the economy by reducing inflationary pressure during periods of economic growth and increasing government revenue during periods of economic contraction.

Question 3

Discretionary fiscal policy is the direct result of deliberate actions by policy makers rather than an automatic adjustment.

Accepted Answer

Discretionary fiscal policy involves deliberate actions taken by policy makers, such as changing tax rates or government spending levels, in order to achieve certain economic goals. It is not an automatic adjustment based on economic conditions.

Question 4

The effect of automatic stabilizers is to increase the size of the multiplier.

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Question 5

If the marginal propensity to consume is 0.8,the multiplier for taxes and transfer payments will be more than 5.

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Question 6

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.

Accepted Answer

Automatic stabilizers are designed to stabilize the economy without specific action from government policymakers, such as through unemployment benefits, progressive income taxes, and corporate profits taxes.

Question 7

Suppose the marginal propensity to consume is 0.8.If the government cut taxes by $100 billion,then real GDP would increase by $500 billion.

Accepted Answer

Since the MPC is 0.8, every $1 of tax cut will increase consumption by $0.8. Therefore, $100 billion tax cut will increase consumption by $80 billion. Using the formula for calculating the expenditure multiplier, we get:
Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5
Therefore, the increase in real GDP will be:
ΔY = Multiplier * ΔC = 5 * $80 billion = $400 billion
Since the given increase in real GDP is $500 billion, which is more than the calculated increase of $400 billion, the statement is true.

Question 8

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts and automatically expansionary when the economy expands.

Accepted Answer

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Question 9

A lump sum tax is a tax whose rate increases as income increases.

Accepted Answer

A lump sum tax is a fixed amount of tax that is imposed on individuals regardless of their income level. It is also known as a poll tax or head tax. It does not increase as income increases.

Question 10

Employment insurance (EI),welfare,rent and daycare subsidies,and student assistance grants and loans are all automatic stabilizers.

Accepted Answer

EI, welfare, rent and daycare subsidies, and student assistance grants and loans all increase during times of economic downturns, providing support to individuals and families who may have lost their jobs or are struggling financially. This injection of funds into the economy helps to stabilize it during times of recession, making these programs automatic stabilizers.

Question 11

The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

Accepted Answer

When individuals receive transfer payments, they may choose to save some of it instead of immediately spending it, leading to a lower multiplier effect than if the government had spent the same amount on goods and services, which would have more directly stimulated economic activity.

Question 12

If government purchases decrease so the budget may be balanced,some government transfers will automatically increase,reducing the multiplier effect.

Accepted Answer

If government purchases decrease, the multiplier effect will be reduced as a result of decreased spending in the economy. This can lead to a decrease in aggregate demand and possibly a recession. However, some government transfers, such as unemployment benefits, may automatically increase as a result of the decrease in government purchases, which can offset some of the negative effects on the economy. Nevertheless, the overall multiplier effect will still be lower than if government purchases had remained constant.

Question 13

A government programme that puts millions of unemployed Canadians to work building bridges,roads,and parks would be considered an automatic stabilizer.

Accepted Answer

An automatic stabilizer is a fiscal policy mechanism that automatically adjusts to economic conditions without new government action, such as unemployment benefits or progressive taxes. A government program creating jobs requires active intervention and is not automatic.

Question 14

A budget deficit necessarily indicates that fiscal policy is expansionary.

Accepted Answer

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Question 15

The tax and government transfer payment multiplier is smaller than the government purchases multiplier because all of an increase in government purchases is spent;only some of tax cuts or increases in government transfers is spent.

Accepted Answer

This is because an increase in government purchases directly increases aggregate demand and therefore leads to a larger increase in GDP. However, tax cuts and increases in government transfers may not be fully spent as individuals may choose to save some of the extra income rather than spend it. Therefore, the multiplier effect on GDP is smaller.

Question 16

The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million.

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Question 17

If the marginal propensity to consume is 0.8 and government transfers decrease by $30 billion,real GDP will decrease by less than $150 billion.

Accepted Answer

If the marginal propensity to consume is 0.8, it means that for every extra dollar of income, 80 cents will be spent. If government transfers decrease by $30 billion, this will result in a decrease in disposable income for many households, which will in turn lead to a decrease in consumption. However, the total decrease in real GDP will be less than $150 billion because only 80% of the decrease in disposable income will be reflected in a decrease in consumption. The actual decrease in GDP will depend on various other factors like the size of the multiplier effect and the extent of crowding out.

Question 18

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

Accepted Answer

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Question 19

Discretionary government spending is an automatic stabilizer.

Accepted Answer

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Question 20

For a marginal propensity to consume of 0.9,the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.

Accepted Answer

The multiplier effect of a tax cut is equal to 1/ (1-MPC), where MPC is the marginal propensity to consume. Using the given MPC of 0.9, the multiplier effect of the tax cut would be 1/ (1-0.9) = 10. Similarly, the multiplier effect of an increase in government purchases would be equal to the multiplier effect of the tax cut, which is 10. Therefore, the statement is false.

Quiz 13: Fiscal Policy