Quiz #80 answers

• 1. If there is more "money" in the economy its value declines.

Answer: Maybe

• 2. If national government public works expenditure funds the construction of a road and then the government tears the road up again and rebuilds it, there is no net gain in employment and national income the second time round.

Answer: False

• 3. If there was a fiscal rule imposed such that the national government had to balance its budget at all times then this would also eliminate the sensitivity of the budget outcome to the automatic stabilisers.

Answer: False

• 4. The private domestic sector will always run a deficit (spend more than they earn) which is exactly equal to the external deficit, if the government balances its budget on average over the business cycle.

Answer: True

• 5. This is the premium question for this week: Consumption adds to aggregate demand and imports drain aggregate demand. The marginal propensity to consume (MPC) is conceptually the extra consumption that is induced for every extra dollar of national income. The marginal propensity to import (MPM) is similarly the extra spending on imports that is induced for every extra dollar of national income. If the MPC and MPM both rise by 0.1 then the impact on aggregate demand for every new dollar of national income generated will be neutral.

Answer: False