Quiz #72

• 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
• Maybe
• 2. It is impossible for all national governments to simultaneously run public surpluses without impairing real economic growth because it is likely that the private domestic sector in some countries will desire to save overall.
• True
• False
• 3. A rising government deficit will always allow the private domestic sector to increase its saving in nominal terms.
• False
• True
• 4. If government net spending increases (rising budget deficit) then policy is becoming more expansionary and the only risk is that nominal aggregate spending growth might exceed the real capacity of the economy to respond by increasing real output and cause inflation.
• Maybe
• False
• True
• 5. 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?
• $150 billion
• $135 billion
• $315 billion
• $450 billion

Quiz #72 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. It is impossible for all national governments to simultaneously run public surpluses without impairing real economic growth because it is likely that the private domestic sector in some countries will desire to save overall.

Answer: False

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

Answer: False

• 4. If government net spending increases (rising budget deficit) then policy is becoming more expansionary and the only risk is that nominal aggregate spending growth might exceed the real capacity of the economy to respond by increasing real output and cause inflation.

Answer: False

• 5. 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