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

Answer: False

2. If an economy is projected to grow in real terms by around 2.1 per cent over the next 12 months. 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 over the period. 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 period than at the beginning?

Answer: 0.9

3. 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 spending 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