Quiz #492

• 1. For the US private domestic sector to reduce its overall overall debt levels, the government must run a fiscal deficit.
• False
• True
• 2. Larger fiscal deficits as a percentage of GDP reduce the local productive resources that are available to the private domestic sector.
• False
• True
• 3. Assume the government increases spending by $100 billion from now and maintains that injection each year for three years. Economists estimate the spending multiplier to be 1.6 and the impact is immediate and exhausted in each year. They also estimate that the import propensity is 0.2 (meaning that imports rise by 20 cents for every dollar generated in the economy) and the current tax rate is equal to 20 per cent. They also estimate that the tax multiplier (impact of tax changes on income) to be equal to 1. The cumulative impact of this fiscal expansion on nominal GDP is:
• $384 billion and households save 28 cents out of every extra disposable dollar generated.
• $384 billion and households save 24 cents out of every extra disposable dollar generated.
• $480 billion and households save 28 cents out of every extra disposable dollar generated.
• $480 billion and households save 24 cents out of every extra disposable dollar generated.

Quiz #492 answers

• 1. For the US private domestic sector to reduce its overall overall debt levels, the government must run a fiscal deficit.

Answer: False

• 2. Larger fiscal deficits as a percentage of GDP reduce the local productive resources that are available to the private domestic sector.

Answer: True

• 3. Assume the government increases spending by $100 billion from now and maintains that injection each year for three years. Economists estimate the spending multiplier to be 1.6 and the impact is immediate and exhausted in each year. They also estimate that the import propensity is 0.2 (meaning that imports rise by 20 cents for every dollar generated in the economy) and the current tax rate is equal to 20 per cent. They also estimate that the tax multiplier (impact of tax changes on income) to be equal to 1. The cumulative impact of this fiscal expansion on nominal GDP is:

Answer: $480 billion and households save 28 cents out of every extra disposable dollar generated.