Question

a) Because of automatic stabilisers, when GDP fluctuates the:

A. government's budget remains in balance

B. government's deficit fluctuates directly with GDP

C. government's deficit fluctuates inversely with GDP

D. the economy will automatically go to full employment

b) If we assume that there are 100 households in the economy and that total income to be distributed across those households is $4000 (per day) and if the 20% poorest households earn $15 per day and the 60% middle income households earn $25 per day, what is the cumulative income earned by the RICHEST 20% of households?

A. $1800 or 45%

B. $1500 or 37.5%

C. $300 or 7.5%

D. $2200 or 55%

c) An increase in taxes or a cut in transfers tends to lower:

A. the government's budget

B. the government's planned tax inflow

C. planned aggregate expenditure

D. planned aggregate output

Answer 1

C. government's deficit fluctuates inversely with GDP

Any government program that tends to reduce fluctuations in GDP automatically is called an automatic stabilizer. Certain government expenditure and taxation policies tend to insulate individuals from the impact of shocks to the economy. Transfer payments have this effect. Because more people become eligible for income supplements when income is falling, transfer payments reduce the effect of a change in real GDP on disposable personal income and thus help to insulate households from the impact of the change. Income taxes also have this effect. As incomes fall, people pay less in income taxes.Hence Because of automatic stabilisers, when GDP fluctuates the government's deficit fluctuates inversely with GDP.

D. $2200 or 55%

20* 15(Poor households) + 60*25(Middle class households) = 1800.Thus rich households earn 2200.

D. planned aggregate output

A, B and C are not true since increases taxes or decreased taxes increases gov. revenue hence allowing it to do A, B and C.