Quiz #503

• 1. Government spending which is not accompanied by a bond sale to the non-government sector immediately adds more to total spending than would be the case if there was a bond sale.
• False
• True
• 2. If the external balance is always in surplus, then the government can safely run a surplus and not impede economic growth.
• False
• True
• 3. Assume the government increases spending by $100 billion in the each of the next three years from now. Economists estimate the expenditure multiplier to be 1.5 and the impact is immediate and exhausted in each year. They also estimate the tax multiplier to be equal to 1 and the current tax rate is equal to 30 per cent (30 cents in the $). What is the cumulative impact of this fiscal expansion on GDP after three years?
• $135 billion
• $150 billion
• $315 billion
• $450 billion

Quiz #503 answers

• 1. Government spending which is not accompanied by a bond sale to the non-government sector immediately adds more to total spending than would be the case if there was a bond sale.

Answer: False

• 2. If the external balance is always in surplus, then the government can safely run a surplus and not impede economic growth.

Answer: False

• 3. Assume the government increases spending by $100 billion in the each of the next three years from now. Economists estimate the expenditure multiplier to be 1.5 and the impact is immediate and exhausted in each year. They also estimate the tax multiplier to be equal to 1 and the current tax rate is equal to 30 per cent (30 cents in the $). What is the cumulative impact of this fiscal expansion on GDP after three years?

Answer: $450 billion