Exploring the Spending Multiplier in Fiscal Policy

The video tutorial explains the concept of the spending multiplier and its role in addressing a recessionary gap. It begins by identifying a recessionary gap and calculating the spending multiplier using the marginal propensity to save. The tutorial then demonstrates how government spending can be adjusted to close the gap, using different marginal propensities to consume. The key takeaway is understanding how varying consumer spending habits affect the amount of government spending needed to achieve economic equilibrium.

What is the primary goal of using the spending multiplier in economic policy?

• To increase inflation

• To increase the national debt

• To reduce the overall spending in the economy

• To close the gap between current and desired output

Why is increasing government spending considered a method to shift aggregate demand to the right?

• It reduces taxes

• It directly increases exports

• It increases overall consumption and investment

• It decreases national savings

What impact does a recessionary gap have on an economy?

• It indicates an economy is overproducing

• It shows the economy is at its full potential

• It signifies a shortfall between current output and potential output

• It means the economy is growing too fast

If the marginal propensity to consume is 0.5, what is the value of the spending multiplier?

• 1

• 2

• 0.5

• 4

What is the formula to calculate the spending multiplier?

• Marginal propensity to consume over 1

• 1 over the marginal propensity to consume

• 1 over the marginal propensity to save

• Marginal propensity to save over 1

How much does the government need to spend to close a recessionary gap of 40 billion dollars with a spending multiplier of 2?

• 40 billion dollars

• 10 billion dollars

• 20 billion dollars

• 80 billion dollars

What is the spending multiplier if the marginal propensity to consume is 0.8?

• 2.5

• 0.8

• 5

• 1.25

What does a higher marginal propensity to consume imply about government spending to close a gap?

• More government spending is needed

• The gap cannot be closed

• Less government spending is needed

• Government spending has no effect

To close a recessionary gap of 40 billion dollars with a spending multiplier of 5, how much must the government spend?

• 10 billion dollars

• 8 billion dollars

• 200 billion dollars

• 5 billion dollars

How does the concept of the spending multiplier help in understanding the effects of fiscal policy?

• It proves that government spending has no real impact on economic growth

• It demonstrates how initial government spending can have a multiplied effect on the economy

• It illustrates the direct relationship between government spending and national debt

• It shows how tax cuts are the most effective fiscal tool