Question

Which of the following can be categorized under fiscal policy?
A. Increase in money supply
B. Decrease in money supply
C. Increase in federal funds rate
D. Decrease in reserve requirement
E. Increase in tax rates

Calculate the government spending multiplier if, an increase in government spending by $5 million increases real GDP by $25 million.

A. 0.2

B. 0.5

C. 2

D. 5

E. 6

Answer 1

1)

Monetary policy is mainly concerned with management of interest rate and supply of money in the economy, while fiscal policy is mainly concerned with tax rates and government spending.

Therefore from the above given options increase in tax rates can be categorized under fiscal policy.

2)

​​​​​​government spending multiplier is the change in GDP caused by a unit change in government spending.

government spending multiplier =

(change in GDP) / (change in government spending) =

(25 million) / (5 million) = 5