Quiz #637

• 1. Mainstream economists use the notion of 'crowding out' to argue that public spending squeezes out private spending and results in a less efficient allocation of resources overall. Modern Monetary Theory (MMT) denies that crowding out can occur.
• True
• False
• 2. A rising government deficit will always allow the private domestic sector to increase its overall saving in nominal terms.
• False
• True
• 3. Assume the government increases spending by $100 billion in the each of the next three years from now. Economists estimate the spending multiplier to be 1.5 and the impact is immediate and exhausted in each year. They also estimate the tax multiplier (which captures the impact of rising tax rates on GDP) to be equal to 1 and the current average tax rate is equal to 30 per cent. What is the cumulative impact of this fiscal expansion on GDP after three years?
• $135 billion
• $150 billion
• $315 billion
• $450 billion

Quiz #637 answers

• 1. Mainstream economists use the notion of 'crowding out' to argue that public spending squeezes out private spending and results in a less efficient allocation of resources overall. Modern Monetary Theory (MMT) denies that crowding out can occur.

Answer: False

• 2. A rising government deficit will always allow the private domestic sector to increase its overall saving in nominal terms.

Answer: False

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

Answer: $450 billion