Deck 11: Expenditure and Fiscal Policy

Question 1

The slope of the consumption line is equal to _____.

A) autonomous consumption
B) the level of savings
C) the marginal propensity to consume
D) the level of planned expenditure

Answer 1

the marginal propensity to consume

Question 2

Which of the following is true for a country like China that is heavily reliant on external demand?

A) The Chinese economy is more likely to be affected by changes in consumption in other countries.
B) An decrease in China's GDP will affect all the sectors of the economy equally.
C) The driving force behind economic growth in China is domestic consumption and investment.
D) Net exports as a percentage of GDP in China is likely to be low.

Answer 2

The Chinese economy is more likely to be affected by changes in consumption in other countries.

Question 3

The 45° line in the Keynesian Cross model shows:

A) the points where planned expenditure is lesser than the national output.
B) the points of intersection between aggregate demand and aggregate supply.
C) the points at which planned expenditure is equal to ?rms' actual output.
D) the points where planned expenditure is greater than the national output.

Answer 3

the points at which planned expenditure is equal to ?rms' actual output.

Question 4

Suppose an individual's marginal propensity to consume is equal to 0.8, what is his marginal propensity to save?

A) 0
B) -0.8
C) 1
D) 0.2

Question 5

In the Keynesian Cross model, which of the following variables is assumed to be constant?

A) Planned expenditure.
B) Prices.
C) Investment.
D) Consumption.

Question 6

Suppose an individual's marginal propensity to save is equal to 0.7, what is his marginal propensity to consume?

A) 1
B) -0.7
C) 0.3
D) 0

Question 7

The marginal propensity to consume refers to _____.

A) the extra consumption when income increases by an extra unit
B) the proportion of total income which is spent on consumption
C) the proportion of total income that is spent on inferior goods
D) the decrease in consumption that will result from an increase in income

Question 8

During a recession, which of the following will increase the level of business con?dence in an economy?

A) The government increases income tax rates.
B) The government increases spending on infrastructure.
C) The government increases borrowing and debt funding.
D) The government places restrictions on exports.

Question 9

If the marginal propensity to save is 0.25, personal disposable income is £200 and autonomous consumption is £15, what is the level of consumption?

A) £150
B) £165
C) £50
D) £65

Question 10

Investment by ?rms in an economy is considered autonomous because _____.

A) investment decisions are not in?uenced by the current level of income
B) the level of investment depends on autonomous consumption
C) investment decisions depend on the level of in?ation
D) the level of investment changes at different levels of output

Question 11

Suppose an individual's marginal propensity to save is 0.8. If his income increases by £400, by how much will his savings increase?

A) £32
B) £80
C) £8
D) £320

Question 12

Which of the following statements is true of the relationship between marginal propensity to consume (MPC) and marginal propensity to save (MPS)?

A) MPC + MPS = -1
B) MPC + MPS = 0
C) MPC + MPS = 1
D) MPC + MPS >1

Question 13

The Keynesian Cross model of equilibrium output shows the relationship between:

A) aggregate demand and in?ation.
B) planned aggregate expenditure and output.
C) between in?ation and unemployment.
D) autonomous expenditure and planned expenditure.

Question 14

Planned aggregate expenditure in an economy is equal to:

A) the level of spending on goods and services in an economy that is planned by purchasers.
B) the level of planned expenditure on the economy by a government.
C) the level of expenditure that a ?rm will plan to spend on factors of production.
D) the level of investments which foreign ?rms plan to make in the domestic economy.

Question 15

Autonomous consumption refers to consumption _____.

A) that increases more than proportionately with an increase in income
B) that is undertaken by an individual when their income is zero
C) that occurs after the individual has earned a certain level of income
D) on luxury goods like yachts and diamonds

Question 16

Which of the following correctly describes a closed economy?

A) In a closed economy, consumption by households is equal to zero.
B) A closed economy is one where there is no government sector.
C) In a closed economy, investment by domestic ?rms is equal to zero.
D) A closed economy is one that depends entirely on domestic consumption and investment.

Question 17

The equilibrium level of output in an economy is determined at the level where:

A) planned aggregate government spending is equal to the investments made by private ?rms.
B) planned aggregate exports is equal to the actual output of ?rms.
C) planned aggregate investment is equal to the actual output of ?rms.
D) planned aggregate expenditure is equal to the actual output of ?rms.

Question 18

The marginal propensity to save shows _____.

A) the extra saving generated by one unit of extra income
B) the proportion of income that is spent on consumption
C) the proportion of total income that is saved by an individual
D) the extra savings by households when interest rates increase

Question 19

Suppose an individual's marginal propensity to save is 0.3. If his income increases by £100, by how much will his consumption increase?

A) £30
B) £100
C) £70
D) £3

Question 20

Suppose consumption is equal to £170. If autonomous consumption is £20 and income is £200, what is the value of the marginal propensity to consume (MPC)?

A) 0.5
B) 0.65
C) 0.7
D) 0.75

Question 21

Which of the following correctly describes the multiplier in an economy?

A) It is a measure of how much consumption increases as consumers' income grows.
B) It is a measure of how much output grows following an increase in autonomous
C) It is a measure of how much consumption falls as savings increases.
D) It is a measure of how much investment increases as the interest rate falls.

Question 22

Suppose the government increases both spending and taxes by 100. According to the balanced budget multiplier, which of the following is likely to happen?

A) The equilibrium level of output in the economy will decrease.
B) The marginal propensity to consume will increase.
C) The marginal propensity to consume will decrease.
D) The equilibrium level of output in the economy will increase.

Question 23

If planned aggregate expenditure in the economy is 400 and the level of national output is 250, then which of the following is true?

A) There will be excess demand for goods and services in the economy.
B) The unsold stocks of goods with ?rms will increase sharply.
C) Firms will have to reduce production since aggregate demand in the economy will fall.
D) The quantity of goods and services demanded in the economy will be equal to the quantity

Question 24

Suppose the value of marginal propensity to save (MPS) is 0.25, investment is £300 and autonomous consumption is £250 in a closed economy with no government sector. What is the equilibrium national output?

A) £5500
B) £7500
C) £6250
D) £2200

Question 25

In a closed economy with no government sector, the marginal propensity to save (MPS) is 0.25. Therefore, the value of the multiplier will be equal to _____.

A) 5
B) 1.33
C) 2
D) 4

Question 26

Suppose the value of the marginal propensity to consume (MPC) in a closed economy is 0.75, autonomous consumption is £300 and national output is 1500. If the tax rate is 8%, what is the level of consumption in the economy?

A) £1035
B) £1335
C) £1380
D) £465

Question 27

If the marginal propensity to save (MPS) in a closed economy is 0.02 and the marginal propensity to tax (MPT) is 0.06, what is the value of the multiplier?

A) 6
B) 10.5
C) 8.5
D) 12.5

Question 28

In the Keynesian Cross model, the equilibrium national output is determined at the point where:

A) autonomous consumption is equal to investment.
B) the 45° line intersects the aggregate demand line.
C) the planned expenditure line is horizontal.
D) the aggregate demand line intersects the aggregate supply curve.

Question 29

Suppose the marginal propensity to consume in an economy is equal to 0.6. The government increases both taxes and spending by 100. What is the net effect on aggregate demand?

A) Aggregate demand will increase by 100.
B) Aggregate demand will fall by 100.
C) Aggregate demand will increase by 40.
D) Aggregate demand will fall by 40.

Question 30

The higher the level of taxation in an economy, _____.

A) the steeper the aggregate demand line
B) the ?atter the aggregate demand line
C) the higher aggregate demand line
D) the lower the aggregate demand line

Question 31

According to the Keynesian Cross model, ?rms will have to reduce production when:

A) there is excess demand for goods and services.
B) inventory levels begin to fall.
C) aggregate demand equals the level of national output.
D) the level of national output exceeds aggregate demand.

Question 32

If the value of the multiplier in a closed economy with no government sector is equal to 5, then which of the following is true?

A) The level of output of goods and services in the economy will equal 100.
B) The marginal propensity to consume in the economy will be equal to 0.4.
C) The level of investment in the economy will be equal to 400.
D) The marginal propensity to save in the economy will be equal to 0.2.

Question 33

The largest source of revenue for the UK government is _____.

A) value-added tax
B) income tax
C) business rates
D) corporation tax

Question 34

In a closed economy with no government sector, the marginal propensity to consume (MPC) is 0.6. Therefore, the value of the multiplier will be equal to _____.

A) 2
B) 2.5
C) 1.66
D) 6

Question 35

Assume a closed economy with no government sector. If the level of consumption in the economy is £200, savings is £150 and investment is £100, then planned aggregate expenditure in the economy will be equal to _____.

A) £450
B) £100
C) £300
D) £350

Question 36

Expenditure on _____ accounts for more than 60 per cent of government spending in the UK.

A) social security, health and education
B) national defence
C) debt interest
D) industry, agriculture and employment

Question 37

The marginal propensity to save (MPS) in a closed economy is 0.1. By how much will national output increase if autonomous expenditure increases by £200?

A) 20
B) 2000
C) 200
D) 1000

Question 38

Suppose national output is £3500, autonomous consumption is £200 and the marginal propensity to consume (MPC) is 0.8 in a closed economy with no government sector. What is the level of investment in this economy?

A) £2500
B) £750
C) £500
D) £3300

Question 39

What does the balanced budget multiplier state?

A) An increase in government spending plus an equal increase in taxes, leads to higher equilibrium output.
B) An increase in government spending leads to a decrease in equilibrium output.
C) An increase in taxes leads to an increase in equilibrium output.
D) An increase in government spending plus an equal decrease in taxes will lead to lower

Question 40

The value of the multiplier increases when _____.

A) the marginal propensity to consume is zero
B) the marginal propensity to save increases
C) the marginal propensity to save decreases
D) the marginal propensity to save is zero

Question 41

How is the multiplier calculated in an open economy with government sector?

A) 1/(marginal propensity to consume + marginal propensity to save + marginal propensity to export)
B) 1/(marginal propensity to consume)
C) 1/(marginal propensity to tax + marginal propensity to export)
D) 1/(marginal propensity to consume + marginal propensity to tax + marginal propensity to

Question 42

The total outstanding government debt from borrowings over many years is called _____.

A) government de?cit
B) crowding out
C) cumulative debt
D) debt funding

Question 43

The economy's structural de?cit widens when _____.

A) government borrowings increase during a period of recession
B) private borrowings are higher than government borrowings
C) government borrowings increase during a period of economic growth
D) the government's external borrowings are greater than its internal borrowings

Question 44

Which of the following is true of taxation as a tool of ?scal policy?

A) Compared to government expenditure, tax cuts are less effective at increasing total expenditure.
B) When the marginal propensity to save is high, tax cuts are highly effective in increasing
C) Tax cuts create an immediate change in consumers' income and consumption.
D) Compared to government expenditure, tax cuts have a longer time lag.

Question 45

During a recession, tax cuts are considered less effective than government expenditure in increasing aggregate demand because _____.

A) governments have complete information about consumer preferences
B) the marginal propensity to save is very low in a recession
C) consumers tend to spend less and save more during uncertain business conditions
D) market-based economies are the best means of allocating resources

Question 46

An economy's structural budget _____.

A) is not adjusted for the effect of business cycles
B) shows a surplus at the full employment level
C) shows a de?cit at the full employment level
D) is zero at the full employment level

Question 47

The government collects data on economic activity but is only able to con?rm either a slowdown or an increase in economic activity three to six months after the event. This problem is known as _____.

A) a time lag
B) an offsetting change
C) crowding out
D) a destabilizer

Question 48

Which of the following is true of exports as a component of aggregate demand?

A) If exports are greater than imports, the economy has a trade de?cit.
B) Exports increase the economy's leakages and reduce the size of the multiplier.
C) Exports are independent of the domestic economy's level of income.
D) As income levels increase, an economy moves from a trade surplus to a trade de?cit.

Question 49

The private sector will have to borrow at the same interest rates that the government borrows at. As the government increases its borrowing, this leads to _____.

A) offsetting changes
B) the multiplier effect
C) ?nancial crowding out
D) a government surplus

Question 50

Which of the following statements is true?

A) When an economy operates at the full employment level, it is at a point above its production possibility frontier.
B) Government de?cits tend to increase during recessions.
C) An economy that is booming is at its full employment level.
D) As economies boom, tax receipts fall and government spending increases.

Question 51

In an open economy, the size and effectiveness of the multiplier _____.

A) is relatively high because imports always exceed exports in an open economy
B) is relatively lower because exports are an injection in the circular ?ow of income
C) is relatively higher because the marginal propensity to export is higher
D) is relatively lower because imports are a leakage from the circular ?ow of income

Question 52

Suppose the marginal propensity to consume is 0.5, the marginal propensity to tax is 0.3 and the marginal propensity to import is 0.25 in an open economy with government sector. What is the approximate size of the multiplier?

A) 0.95
B) 1
C) 0.89
D) 0.7

Question 53

Which of the following is an effect of crowding out?

A) A reduction in the size of the government de?cit.
B) An increase in private investment.
C) A fall in the cost of private debt.
D) A reduction in the size of the multiplier.

Question 54

Fiscal policy is more effective than monetary policy in increasing aggregate demand when _____.

A) the economy is in a boom
B) in?ation and unemployment levels are at very low levels
C) the crowding out effect is strong
D) interest rate changes have no effect on production and consumption

Question 55

Which of the following is a problem associated with using ?scal policy?

A) Fiscal policy is usually ineffective in increasing aggregate demand.
B) The central bank may not accurately guess the size of the multiplier, rendering ?scal policy
C) Fiscal policy is usually more effective in increasing aggregate supply than aggregate demand.
D) The government may overestimate the optimal level of output in the economy.

Question 56

Which of the following would erode the real value of government debt?

A) A ?xed exchange rate.
B) An increase in in?ation.
C) An increase in real GDP.
D) An increase in income tax rates.

Question 57

The presence of automatic stabilizers in an economy suggest that _____.

A) the time lags in implementing ?scal policy are likely to be long
B) in a recession, tax receipts will increase
C) the government need not use ?scal policy to monitor economic activity
D) structural de?cits in an economy are likely to be very high

Question 58

Which of the following correctly describes a government's de?cit?

A) It is the level of crowding out caused when government expenditure is increased.
B) It is the difference between government spending and taxation.
C) It is the amount of funds that have not been spent out of tax receipts.
D) It is the difference between the exports and imports of a country.

Question 59

An increase in government expenditure will NOT crowd out private spending when:

A) the economy is at full employment.
B) the level of unemployment is high.
C) interest rates are very low.
D) in?ation is very high.

Question 60

As an economy begins to recover from a recession:

A) cyclical de?cits will reduce.
B) government spending will increase.
C) structural de?cits will reduce.
D) tax revenues will fall.

Question 61

Crowding out occurs when increased government spending reduces the level of private spending in an economy.

Question 62

Unlike monetary policy, fiscal policy does not operate with a time lag.

Question 63

If the marginal propensity to save (MPS) in a country is 0.1, then any increase in autonomous expenditure would multiply output in the economy by 10.

Question 64

A trade surplus would mean that the economy is exporting more goods than it is importing.

Question 65

Autonomous consumption is the extra consumption that is generated as more income is earned.

Question 66

An increase in tax receipts during an economic boom is an example of an automatic stabilizer in an economy.

Question 67

Employment prospects and sales help determine the level of consumer confidence in an economy.

Question 68

As government debt reduces, inflationary expectations will be revised upward.

Question 69

An economy with the government sector has a relatively larger multiplier than an economy where there is no government spending and taxation.

Question 70

The consumption function is plotted as an upward-sloping curve.

Question 71

The value of the marginal propensity to consume lies between +1 and -1.

Question 72

Investment decisions in the economy depend on the current level of income.

Question 73

The balanced budget multiplier states that an increase in government spending, plus an equal increase in taxes, will leave the equilibrium output unchanged.

Question 74

During a depression, the risk of crowding out due to government spending is relatively lower.

Question 75

An increase in taxes makes the aggregate demand line steeper.

Question 76

Fiscal policy is the government's decisions regarding money supply and interest rates.

Question 77

A government that takes an expansionary fiscal stance would reduce taxes and increase spending.

Question 78

The level of consumer confidence significantly affects the marginal propensity to consume.

Question 79

In the Keynesian Cross model it is assumed that there is no inflation.

Question 80

The fiscal stance is the economy's full employment budget position which is adjusted for the business cycle.