Question

Which of the following statements regarding fiscal policy are true? Select all that apply. Select one...

Which of the following statements regarding fiscal policy are true? Select all that apply.

Select one or more:

a. fiscal policy affects taxes and/or government spending

b. fiscal policy is directed by the Federal Reserve in the United States

c. fiscal policy changes the money supply

2. According to the multiplier effect, if MPC = 0.6, then what is the effect of a $100,000 increase in government spending on aggregate demand?

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Answer #1

a. fiscal policy affects taxes and/or government spending - TRUE

Fiscal policy is the policy that changes the money supply through taxes and government spending in expansion or contraction.

b. fiscal policy is directed by the Federal Reserve in the United States - FALSE

Fiscal Policy is directed by the Governement and not the central bank.

c. fiscal policy changes the money supply - TRUE

Fiscal Policy changes money supply through changes in taxes or government spending.

MPC = 0.6

MPS = 1- MPC

MPS = 0.4

Multiplier = Change in Income/Change in Government Spending = 1/MPS

1/0.4 = Increase in Income/100,000

Increase in Income or AD = $250,000

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