Question 1

Increased government transfers constitute contractionary fiscal policy.

Accepted Answer

Increased government transfers, such as welfare or unemployment benefits, typically lead to increased demand and can be expansionary fiscal policy rather than contractionary.

Question 2

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 is the percentage of a household's income that is spent on consumption. It is not related to income tax payments.

Question 3

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 4

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

Transfer payments are usually used for consumption and often saved, which reduces their impact on aggregate demand and the multiplier effect. On the other hand, government purchases of goods and services are usually used for investment, which has a larger impact on aggregate demand and the multiplier effect.

Question 5

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.

Accepted Answer

The answer of The tax multiplier for someone living below...

Question 6

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 7

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 8

Lyndon Johnson's tax surcharge was an expansionary fiscal policy that increased aggregate demand.

Accepted Answer

The answer of Lyndon Johnson's tax surcharge was an expansionary...

Question 9

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 for government purchases is calculated as 1/(1-MPC), which in this case is 1/(1-0.9) = 10. The multiplier effect for a tax cut is calculated as MPC/(1-MPC), which in this case is 0.9/(1-0.9) = 9. Therefore, the multiplier effect for government purchases is larger than the multiplier effect for a tax cut.

Question 10

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

Question 11

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

The answer of The tax and government transfer payment multiplier...

Question 12

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 disposable income and consumption, thereby increasing aggregate demand.

Question 13

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

A change in taxes affects disposable income which in turn affects consumption spending. However, it may also affect business investment and international trade. While it has an effect on aggregate demand, it may not be as significant as a change in government spending on goods and services which directly increases demand for goods and services in the economy.

Question 14

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 suggests that excessive intervention by the government can create uncertainty and unpredictability, leading to unintended consequences and potentially making the economy more volatile.

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 leads to an increase in aggregate demand, all else held equal. It is considered an autonomous increase as it is not caused by any changes in output or prices.

Question 16

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 is enacted by the government, which can take time to recognize the need for intervention in the economy. It may take a while to gather and analyze data to determine whether the economy is experiencing a recessionary or inflationary gap. Therefore, there is a lag associated with fiscal policy.

Question 17

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

Accepted Answer

The multiplier is calculated as 1 / (1 - MPC), where MPC is the marginal propensity to consume. Therefore, as MPC increases, the denominator decreases, causing the multiplier to increase.

Question 18

Suppose the marginal propensity to consume is 0.8. If the government cut taxes by $100 billion, then real GDP would increase by $400 billion.

Accepted Answer

With a marginal propensity to consume of 0.8, for every dollar of disposable income, 80 cents will be spent. Therefore, a tax cut of $100 billion would lead to an increase in disposable income of $100 billion, of which $80 billion will be spent, leading to a rise in real GDP of $400 billion (the multiplier effect: 1/1-mpc = 1/0.2 = 5, multiplied by the initial change in spending of $80 billion = $400 billion).

Question 19

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 20

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 uses expansionary fiscal policy, not contractionary fiscal policy. This means they would reduce taxes and/or increase spending to stimulate the economy and close the gap.

Quiz 25: Fiscal Policy