Quiz #136

• 1. Economists use two multipliers to estimate the impact on GDP of an expansion in government spending associated with rising tax rates. The spending multiplier indicates the extent to which GDP rises as a result of the extra aggregate demand arising from the increased government spending. The tax multiplier indicates the impact of rising tax rates on GDP as labour supply is reduced because of the disincentives associated with taxation. The net effect on GDP is the sum of these two impacts.
• False
• True
• 2. Assume that the government increases spending by $100 billion at the start of each year and maintains this policy for the next three years from now. Economists estimate the spending multiplier to be 1.5 and the impact is exhausted within each year (all induced consumption is completed within 12 months). The tax multiplier is estimated to be equal to 1 and the current tax rate is equal to 30 per cent (so tax revenue rises by 30 cents for every extra dollar of GDP produced ). What is the cumulative impact of this fiscal expansion on GDP after three years?
• $135 billion
• $150 billion
• $315 billion
• $450 billion
• 3. If the household saving ratio rises and there is an external deficit then Modern Monetary Theory (MMT) tells us that the government must increase net spending to fill the private spending gap or else national output and income will fall.
• False
• True
• 4. The US economy is projected to grow in real terms by around 1.5 per cent in 2011. At present the Conference Board expects real GDP per employed person to grow by 1.1 per cent over the same period and there is also the expectation that average weekly hours worked will remain more or less constant in 2011. Which of the following labour force growth rates would provide the basis for an expectation that the unemployment rate will be lower at the end of 2011 than at the beginning?
• 0.5 per cent
• 2.6 per cent
• 0.3 per cent
• Cannot tell because we don't know what the participation rate is likely to be.
• 5. Premium question: EMU member nations face solvency risk because they do not issue their own currency. This source of risk would be eliminated if these nations exited the Eurozone and re-established their currency sovereignty - that is, issued their own floating currency.
• False
• True

Quiz #136 answers

• 1. Economists use two multipliers to estimate the impact on GDP of an expansion in government spending associated with rising tax rates. The spending multiplier indicates the extent to which GDP rises as a result of the extra aggregate demand arising from the increased government spending. The tax multiplier indicates the impact of rising tax rates on GDP as labour supply is reduced because of the disincentives associated with taxation. The net effect on GDP is the sum of these two impacts.

Answer: False

• 2. Assume that the government increases spending by $100 billion at the start of each year and maintains this policy for the next three years from now. Economists estimate the spending multiplier to be 1.5 and the impact is exhausted within each year (all induced consumption is completed within 12 months). The tax multiplier is estimated to be equal to 1 and the current tax rate is equal to 30 per cent (so tax revenue rises by 30 cents for every extra dollar of GDP produced ). What is the cumulative impact of this fiscal expansion on GDP after three years?

Answer: $450 billion

• 3. If the household saving ratio rises and there is an external deficit then Modern Monetary Theory (MMT) tells us that the government must increase net spending to fill the private spending gap or else national output and income will fall.

Answer: False

• 4. The US economy is projected to grow in real terms by around 1.5 per cent in 2011. At present the Conference Board expects real GDP per employed person to grow by 1.1 per cent over the same period and there is also the expectation that average weekly hours worked will remain more or less constant in 2011. Which of the following labour force growth rates would provide the basis for an expectation that the unemployment rate will be lower at the end of 2011 than at the beginning?

Answer: 0.3 per cent

• 5. Premium question: EMU member nations face solvency risk because they do not issue their own currency. This source of risk would be eliminated if these nations exited the Eurozone and re-established their currency sovereignty - that is, issued their own floating currency.

Answer: False