Quiz #653

• 1. Using national accounting rules which dictate that the government balance is always equal to the non-government balance with an opposite sign, we can conclude that if the public sector successfully achieves a fiscal surplus then the private sector must be spending more than it is earning (that is, running a deficit).
• False
• True
• 2. Modern Monetary Theory (MMT) denies that the stock of aggregate spending can exceed the capacity of the productive sector and cause inflation.
• False
• True
• 3. Assume that the government increases spending by $200 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 2 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 average tax rate is equal to 25 per cent (so tax revenue rises by 25 cents for every extra dollar of GDP produced ). What is the cumulative impact of this fiscal expansion on GDP after three years?
• $400 billion.
• $1,200 billion.
• $300 billion.
• $900 billion.

Quiz #653 answers

• 1. Using national accounting rules which dictate that the government balance is always equal to the non-government balance with an opposite sign, we can conclude that if the public sector successfully achieves a fiscal surplus then the private sector must be spending more than it is earning (that is, running a deficit).

Answer: False

• 2. Modern Monetary Theory (MMT) denies that the stock of aggregate spending can exceed the capacity of the productive sector and cause inflation.

Answer: True

• 3. Assume that the government increases spending by $200 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 2 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 average tax rate is equal to 25 per cent (so tax revenue rises by 25 cents for every extra dollar of GDP produced ). What is the cumulative impact of this fiscal expansion on GDP after three years?

Answer: $1,200 billion.