Question 1

Recent data show that government expenditures in Canada, including transfer payments, are:

Accepted Answer

Recent data indicate that government expenditures in Canada, including transfer payments, constitute about 40 percent of GDP, which is higher than in the US, and are roughly comparable to the percentage of GDP that similar expenditures represent in other G7 countries.

Question 2

In 2006, the total revenues in Canada:

Accepted Answer

In 2006, the total revenues in Canada were higher than the total government expenditures plus transfers in Canada.

Question 3

Which of the following statements is false?

Accepted Answer

Government spending is considered an injection into the circular flow of income because it represents additional spending that supports economic activity. Taxes are withdrawals because they reduce the flow of income. Transfer payments are also injections as they increase the income of recipients, enabling more spending. Therefore, statement C is false because it incorrectly categorizes government spending and taxes as both being withdrawals, while in reality, government spending is an injection.

Question 4

Government activity affects aggregate demand by:

Accepted Answer

Government activity affects aggregate demand not only through its direct purchases of goods and services but also by levying taxes and making transfer payments, which influence consumers' disposable income and spending.

Question 5

Which of the following is false?

Accepted Answer

The equation D) S+I+C=G+X-Z is incorrect because it does not represent a standard macroeconomic identity. The correct identity should be Y = C + I + G + X - Z, which is represented in option C.

Question 6

If the MPC is 0.8 out of YD and if government levies a net tax rate of 0.3, then the MPC out of national income (Y) becomes:

Accepted Answer

The MPC out of national income (Y) can be calculated by adjusting the MPC out of disposable income (YD) by the net tax rate. Given an MPC of 0.8 out of YD and a net tax rate of 0.3, the MPC out of Y is calculated as MPC out of YD multiplied by (1 - tax rate), which is 0.8 * (1 - 0.3) = 0.8 * 0.7 = 0.56.

Question 7

When government spending increases and taxes do not:

Accepted Answer

When government spending increases without a corresponding increase in taxes, aggregate expenditure in the economy increases. This leads to a rise in short-run equilibrium output because the additional government spending stimulates economic activity, leading to an increase in overall demand.

Question 8

An equilibrium income in an open economy with government occurs when:

Accepted Answer

The answer of An equilibrium income in an open economy...

Question 9

Other things remaining the same, an increase in taxes:

Accepted Answer

An increase in taxes reduces disposable income, which can lead to a decrease in savings as individuals have less income to save after paying taxes.

Question 10

If income tax rate increases:

Accepted Answer

When the income tax rate increases, individuals have less net income to spend, leading to a decrease in disposable income. This reduction in disposable income typically results in decreased spending, which can lead to a decrease in GDP, as consumer spending is a major component of GDP.

Question 11

Other things constant, if the government imposes a net tax equal to NT = tY, where t is the positive income tax rate, we would expect:

Accepted Answer

The imposition of a net tax NT = tY reduces disposable income, which decreases consumption. This reduces the marginal propensity to consume, leading to a decrease in the slope of the aggregate expenditure curve.

Question 12

Assume that the MPC out of disposable income is 0.80, the income tax rate is 0.20 and the marginal propensity to import is 0.14. Therefore, the slope of the AE curve would be:

Accepted Answer

The answer of Assume that the MPC out of disposable...

Question 13

A $1 increase in government spending will have a larger impact upon national income than a $1 cut in lump sum taxes, because:

Accepted Answer

Not all of a tax cut is spent because individuals might save part of the tax cut instead of spending it, leading to a smaller multiplier effect on national income compared to direct government spending, where the entire amount is injected into the economy.

Question 14

-Refer to Figure 7.1. The diagram shows one consumption function with zero income tax and the other consumption function with 20% income tax rate. We can conclude all of the following except one. The exception is:

Accepted Answer

The slope of the consumption curve with income tax reflects the marginal propensity to consume out of after-tax income, not a specific numerical value unless given by the diagram or additional information. The other statements (A, C, D) logically follow from the effects of an income tax on consumption and the autonomous expenditure multiplier, but the slope's exact numerical value (B) cannot be concluded without specific data.

Question 15

If the MPC is 0.8, the net income tax rate is 0.2, the marginal propensity to import is 0.04 and the government increases spending 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 16

-Refer to Figure 7.2. The diagram demonstrates that an increase in the net tax rate will reduce aggregate expenditure and equilibrium real GDP, because:

Accepted Answer

The consumption function rotates downwards because an increase in the net tax rate reduces disposable income, leading to a decrease in consumer spending, which in turn reduces aggregate expenditure and equilibrium real GDP.

Question 17

If the MPC is 0.8, the net income tax rate is greater than zero, the marginal propensity to import is greater than zero and the government increases spending by $100 million, then we would expect the result, in the short-run, to be:

Accepted Answer

Given an MPC (marginal propensity to consume) of 0.8, an increase in government spending will indeed increase real GDP due to the multiplier effect. However, because the net income tax rate and the marginal propensity to import are both greater than zero, these factors will dampen the multiplier effect. The presence of taxes reduces disposable income, thus reducing the amount consumers can spend out of each additional dollar of income. Similarly, when the marginal propensity to import is greater than zero, some of the spending leaks out of the domestic economy into imports, which does not contribute to domestic GDP. Therefore, while the increase in government spending will lead to an increase in equilibrium real GDP, it will be less than the $500 million increase that would occur with an MPC of 0.8 in a closed economy with no taxes.

Question 18

-Refer to Figure 7.3. The diagram demonstrates that an increase in government expenditure:

Accepted Answer

An increase in government expenditure directly increases aggregate demand, leading to a higher equilibrium real GDP, as depicted in the diagram. It does not necessarily increase investment (which could be crowded out) or the marginal propensity to consume (MPC), which is a behavioral parameter.

Question 19

Which of the following best completes this statement: "Once we include a proportional income tax in the model of aggregate expenditure and equilibrium real GDP, then….:"

Accepted Answer

Including a proportional income tax in the model reduces the multiplier effect because a portion of income goes to taxes rather than being spent or saved by households. This means that any change in spending leads to a smaller change in GDP than it would without the tax, thus lowering the multiplier.

Question 20

Suppose that the government reduces its spending by $10 billion and as a result, equilibrium national income is reduced by $18 billion. The value of the multiplier is:

Accepted Answer

The multiplier is calculated as the change in national income divided by the change in government spending. Here, it is $18 billion / $10 billion = 1.8.

Quiz 7: The Government Sector