Question

the effects of a change in government purchases is multiplied throughout an economy a. only when there is an increase in purchases. b. only when there is a decrease in purchases. c. because these purchases induce increases in consumption spending. d. because taxes are left unchanged. 1 points

if the expenditure multiplier is equal to 4 and government increases taxes by $10 billion, then GDP will contract by

	a.	$10 billion
	b.	$30 billion
	c.	$40 billion
	d.	$60 billion

the use of government spending and taxation to affect real GDP is called    a.   fiscal policy.    b.   monetary policy.    c.   Federal Reserve policy.    d.   none of the above.

The major function of money used to decide what is included in M1 is    a.   a store of value.    b.   a standard of deferred payment.    c.   a medium of exchange.    d.   all of the above. 1 points   

Answer 1

(1) (c)

Increase in induced consumption results in incraese in final output being higher than initial increase in government purchase.

(2) (b)

Let MPC = c.

Spending multiplier = 1 / (1 - c)

4 = 1 / (1 - c)

4 - 4c = 1

4c = 3

c = 0.75

Tax multiplier = - c / (1 - c) = - 0.75 / 0.25 = - 3

When tax increases by $10B, GDP decreases by (10 x 3) = $30B

(3) (a)

Government purchase and taxes are fiscal policy tools.

(4) (c)

M1 includes the most liquid assets, which impact the ability to use money as medium of exchange.