1. National accounting rules dictate that a national government surplus equals a non-government deficit (and vice-versa). If a national government successfully achieves a fiscal surplus through an austerity program then the private domestic sector must be spending more than it is earning.

Answer: False

2. If the stock of aggregate spending in the economy 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 $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 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: $600 billion