1. Using national accounting rules which dictate that the government balance is always equal to the non-government balance with an opposite sign, we can conclude that if the public sector successfully achieves a budget surplus then the private sector must be spending more than it is earning (that is, running a deficit).

Answer: False

2. If the stock of aggregate demand exceeds the capacity of the productive sector to respond by producing extra real goods and services then inflation is inevitable.

Answer: False

3. Assume that the government increases spending by $200 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 2 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 average tax rate is equal to 25 per cent (so tax revenue rises by 25 cents for every extra dollar of GDP produced ). What is the cumulative impact of this fiscal expansion on GDP after three years?

Answer: $1200