Question

Fiscal policy involves

Question 1 options:

	the use of interest rates to influence the level of GDP
	the use of government purchases or taxes to influence the level of GDP
	decreasing the role of the Federal Reserve in the everyday life of the economy
	the use of government purchases to create recessions

Question 2 (1 point)

If the MPC = 0.5 and the current equilibrium GDP is $8000 and we want it to be $10000, government spending needs to

Question 2 options:

	decrease by $1000
	increase by $1000
	decrease by $2000
	increase by $2000

Question 3 (1 point)

If the MPC = 0.6, calculate the tax multiplier

Question 3 options:

	2.5
	-2.5
	-1.5
	1.5

Question 4 (1 point)

If the government increases taxes by $300 million and the MPC is 0.9, what is the impact on GDP?

Question 4 options:

	GDP decreases by $2700 million
	GDP increases by $2700 million
	GDP increases by $3000 million
	GDP decreases by $3000 million

Answer 1

Question1

Fiscal policy uses either government spending or taxes as a tool to revive the economy from inflation or recession.

option1: Interest rates to affect the GDP is used in the Monetary Policy and not as a Fiscal Policy pool. So, this option is incorrect

option2: As stated earlier, fiscal policy use government purchases or taxes to affect the GDP. Hence, this option is correct.

option3: Fiscal Policy is not meant to decrease the role of Federal Reserve rather to aid the Central Bank in reviving the economy. So, this option is incorrect.

option4: Government purchases are done to alleviate recessions and not to create. It boosts the economy by increasing the aggregate demand. So, this option is incorrect.

Hence, 2nd option is the correct option.

Question2

MPC = 0.5

Equilibrium Y = 8000

Expected Y = 10000

delta y = 10000 - 8000 = 2000

Multiplier = 1/1-MPC

Multiplier = 1/1-0.5

Multiplier = 2

We know that, Government expediture multiplier = deltaY/deltaG

2 = 2000/delta G

delta G = 1000

So, the government spending needs to be increased by $1000

Hence, 2nd option is correct.

Question3

MPC = 0.6

Tax Multiplier = -MPC/1-MPC

Tax Multiplier = -0.6/0.4

Tax Multiplier = - 1.5

So, 3rd option is correct.

Question4

deltaT = 3000

MPC = 0.9

Tax Multiplier = -MPC/1-MPC

Tax Multiplier = - 0.9/0.1

Tax Multiplier = -0.9

implies, deltaY/deltaT = -0.9

delta Y/3000 = -0.9

delta Y = -2700

So, increase in the taxes by 3000 will decrease the GDP by $2700 million.

Hence, 1st option is correct.