Question

1.If the government spending multiplier is 1 then a $1 increase in deficit-financed government spending will lead to a zero percentage increase in output.

a-true

b- false

2. If the marginal propensity to consume is 13 then the government spending multiplier is 3.

a-true

b- false

3.Which combination of policies are likely to provide Keynesian stimulus to an economy in a depression?

a-Tax cuts on investment and increases in defense spending.

b-An increase in the income tax rate and an increase in transfers going to unemployed workers.

c-An increase in the income tax rate and cuts in defense spending.

d-An increase in salaries paid to members of Congress and a cut in the money supply.

Answer 1

Government spending multiplier (G_m) is the ratio of change in income (Y) due to change in Government spending (G)

=> G_m = Y/G

= 1/ 1-mpc , where mpc = marginal propensity to save.

1. Here, G_m = 1, G = 1

Y = G_m * G

= 1

So, the statement is false. A $1 increase in the deficit-financed government will 1 percent increase the output.

2. Here, mpc = 13

G_m = Y/G

= 1/ 1-mpc , where mpc = marginal propensity to save.

Therefore, G_m = 1/ (1- 13)

= -0.083

So, the statement is false.

3. In the case of depression in the Keynesian economy, the government uses a stimulative fiscal policy to stabilize the economy.

So, option a is correct. A tax cut on investment and an increase in defense spending will stabilize the economy.