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WorksheetsUnit 4: The govenrment and Fiscal Policy
Total questions: 49
Worksheet time: 25mins
What is fiscal policy?
Policy controlling interest rates
Government's spending and taxing policies
Export and import policies
Monetary policy of the Central Bank
Net taxes (T) are
Income after taxes
Total taxes
Taxes paid minus transfer payments
Total spending of government
Disposable income (Yd) is
Y+T
Y-T
T-Y
Y+G
Planned aggregate expenditure (AE) is
C+I
C+G
C+I+G
C+S+G
Budget balnce equals:
G-T
T-G
G+T
T+G
If T-G > 0, the government is running a:
Balanced budget
Deficit
Surplus
Crisis
If T - G <0, the government is running a
Deficit
Surplus
Balanced budget
Structual budget
The consumption function with taxes is:
C = a + bY
C = a + b(Y − T)
C = a + bT
C = a + bY + T
The investment (I) is assumed to be:
A function of taxes
Constant
Increasing over time
Related to inflation
Government purchases (G) are:
Dependent on income
Constant (exogenous)
A function of taxes
Increasing with exports
Disposable income is also known as:
Nominal income
Gross income
After-tax income
Transfer income
Saving is defined as:
Y – T – C
Y – G
C – Yd
G – T
If Y = C + S + T, and Y = C + I + G, then at equilibrium:
S + T = I + G
C = I
S = G
T = I
The term “discretionary fiscal policy” refers to:
Automatic policies
Deliberate changes in T or G
Tax increases due to inflation
Changes in monetary policy
A closed economy includes:
Imports and exports
Only households and firms
. No international trade
Central banks only
AE = C + I + G is valid in:
An open economy
A command economy
A closed economy
All types of economies
The formula for disposable income is:
Y + T
Y − T
T − G
G − T
Yd = Y − T is used in:
A. Aggregate supply equations
Monetary policy
. Consumption functions
Balance of payments
In equilibrium, output equals:
AE
. S + T
C + I
Exports – Imports
If AE > Y, inventories will:
Increase
Decrease
Stay constant
Disappear
Government affects investment through:
Tax policies
Export subsidies
Wage regulations
Interest rate targeting
The AE function can shift due to changes in:
Net exports only
I, G, or T
Interest rates only
Prices only
A decrease in taxes leads to:
Lower disposable income
. Higher disposable income
No change in consumption
Decrease in government spending
Planned investment (I) in this unit is:
A function of inflation
Affected by wages
Constant
Negative
The government spending multiplier is defined as
∆T / ∆Y
∆G / ∆Y
1 / MPS
MPC / MPS
If MPC = 0.75, then the spending multiplier equals:
2
3
4
1.5
The formula for tax multiplier is:
−MPC / (1 − MPC)
1 / MPC
−1 / MPS
MPC / MPS
Tax multiplier is always:
Greater than government multiplier
Negative
Zero
Positive
A balanced-budget multiplier is always:
Greater than 1
Equal to zero
Equal to one
Negative
If government increases G by 50 and MPC = 0.75, ∆Y equals:
150
200
250
300
A tax cut of 50 with MPC = 0.75 leads to ∆Y:
150
200
-150
100
If MPC = 0.8, what is the tax multiplier
-4
-5
-2.5
-3
A tax increase causes AE to:
Increase
Stay the same
Decrease
Rise initially then fall
A government spending increase causes AE to:
Stay constant
Decrease
Shift upward
Shift downward
In a closed economy, equilibrium output is where:
AE = Y
T = G
I = S
AE = T
The initial effect of a tax cut on AE is through:
Investment
Government spending
Disposable income
Inflation
In the saving-investment equilibrium approach:
S = I
S + (T − G) = I
S + G = T
S = T + G
The reason why tax multiplier is smaller in absolute value than the spending multiplier is:
Taxes are delayed
Part of the tax cut is saved
Taxes increase consumption
Government spending is inefficient
The marginal propensity to consume (MPC) is:
∆Y / ∆C
∆C / ∆Y
∆S / ∆Y
Y / C
The marginal propensity to save (MPS) is equal to:
1 + MPC
1 / MPC
1 − MPC
MPC − 1
If MPC = 0.6, then MPS =
0.6
0.4
1.4
0.2
What happens when G = T and both increase by the same amount?
No change in Y
Y increases
Y decreases
Consumption falls
Balanced-budget multiplier implies:
∆Y = ∆G − ∆T
∆Y = ∆G
∆Y = 0
∆Y = MPC × ∆G
The larger the MPC, the:
. Smaller the multiplier
Larger the multiplier
No effect on multiplier
More negative the multiplier
When government increases both G and T by 100, the equilibrium income:
Rises by more than 100
Falls
Rises by exactly 100
Does not change
The spending multiplier is always:
<1
>1
=0
<0
The total change in output from ∆G depends on:
Inflation
Interest rates
Multiplier and ∆G
Net exports
A tax cut leads to:
Lower Yd
Higher Yd
Lower AE
Increased inventories
In the multiplier model, investment is:
Constant
A function of G
Affected by T
Negatively sloped
