1. In the wake of a rising household saving ratio, a nation with an external deficit will move towards recession unless government net spending increases.

Answer: False

2. The IMF recently downgraded their real GDP growth estimates. The US economy is now projected to grow in real terms by around 2.1 per cent in 2013. Real GDP per employed person is estimated 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 2013. 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 2013 than at the beginning?

Answer: 0.9

3. EMU member nations would eliminate their exposure to solvency risk if they exited the Eurozone and re-established their currency sovereignty - that is, issued their own floating currency.

Answer: False

4. 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

5. Premium Question: The IMF recently admitted they had made serious errors in their modelling and grossly underestimated the size of spending multipliers. 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. 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