Quiz #590

• 1. Larger fiscal deficits as a percentage of GDP reduce the local productive resources that are available to the private sector.
• False
• True
• 2. A national government that issues its own currency and freely floats it on foreign markets never faces a risk of insolvency.
• False
• True
• 3. Assume the government increases spending by $100 billion from now and maintains that injection for three years. Economists estimate the spending multiplier to be 1.6 and the impact is immediate and exhausted in each year; 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. Which of the following statements is correct?
• The cumulative impact of this fiscal expansion on nominal GDP is $480 billion and the private sector saves 24 cents out of every extra disposable dollar generated.
• The cumulative impact of this fiscal expansion on nominal GDP is $480 billion and the private sector saves 28 cents out of every extra dollar disposable generated.
• The cumulative impact of this fiscal expansion on nominal GDP is $384 billion and the private sector saves 28 cents out of every extra dollar disposable generated.
• The cumulative impact of this fiscal expansion on nominal GDP is $384 billion and the private sector saves 28 cents out of every extra dollar disposable generated.

Quiz #590 answers

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

Answer: True

• 2. A national government that issues its own currency and freely floats it on foreign markets never faces a risk of insolvency.

Answer: False

• 3. Assume the government increases spending by $100 billion from now and maintains that injection for three years. Economists estimate the spending multiplier to be 1.6 and the impact is immediate and exhausted in each year; 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. Which of the following statements is correct?

Answer: The cumulative impact of this fiscal expansion on nominal GDP is $480 billion and the private sector saves 28 cents out of every extra dollar disposable generated.