Calculating multipliers with fiscal policy
If MPC = 0.8, what is the spending multiplier
5
Which curve shifts in long run adjustment
SRAS
If the MPC is 0.75 and the government increases spending by $40 billion, what is the maximum possible change in real GDP?
(A) 30 billion increase
(B) 40 billion increase
(C) 120 billion increase
(D) 160 billion increase
(E) 200 billion increase
D
1/0.25 = 4 x 40 = 160 billion
If MPC = 0.75, what is the tax multiplier?
3 or -3
What happens to wages when theres recession in the long run
Falls
Economy is experiencing an inflationary gap. Which of the following responses correctly identifies a fiscal policy action that will close the gap
(A) Increase government spending and decrease taxes
(B) Increase government spending and increase taxes
(C) Decrease government spending and decrease taxes
(D) Decrease government spending and increase taxes
(E) Increase government spending and keep taxes
D
Government increases taxes by $200 billion. MPC = 0.8. By much does GDP get affected?
-800 billion
Tax multiplier is 4
-200 x 4 =-800 billion
What happens to price level when theres a inflationary gap in the long run
Increases
Suppose the government cuts taxes by $50 billion and the MPS is 0.2 What is the total change in real GDP?
(A) 40 billion increase
(B) 50 billion increase
(C) 200 billion increase
(D) 250 billion increase
(E) 200 billion decrease
C
Tax multiplier = Spending multiplier - 1
4 x 50 = 200 billion increase
Government increases spending by 150 billion AND cuts taxes by 50 billion. MPC = 0.8. What is the final change in GDP?
950 billion
5 x 150 = 750 billion
4 x 50 = 200 billion
750 + 200 = 950 billion
Assuming the economy is in full employment and then AD falls. After long run adjustment, what happens to price level and output
PL decrease, output returns to full employment (no change)
An economy is currently producing at a level above full employment. In the long run, without government intervention, which of the following will happen?
(A) Wages will increase, SRAS will shift left, and the price level will rise
(B) Wages will decrease, SRAS will shift right, and the price level will fall
(C) Wages will increase, AD will shift left, and output will return to full employment
(D) Wages will decrease, AD will shift right, and output will increase
(E) LRAS will shift right to meet AD
A
Inflationary gap leads to higher Wages.
That will shift SRAS left and pl will increase
Government decreases spending by $100 billion AND decreases taxes by $50 billion. MPS = 0.25. What is the total change in GDP? Does the government move toward deficit or surplus?
-250 billion and surplus
Spending multiplier is 4
Tax multiplier is 3
-400 + 150 = -250 billion = surplus
Assume the economy starts at full employment. Then there is a large increase in oil prices, making SRAS shift left. Wages do not adjust in the long run. What happens to output and the price level? Does the economy return to full employment?
Output decrease, price level increase. It does not return to full employment
SRAS shifts left from oil prices so output decreases and pl increase
Wages do not adjust means SRAS never shifts right.
Economy will not move back to full employment
Assume the MPC is 0.8. The government increases spending by $100 billion and increases taxes by $100 billion at the same time. What is the total change in real GDP?
(A) 100 billion increase
(B) 100 billion decrease
(C) No change
(D) 800 billion increase
(E) 900 billion increase
A
5 x 100 = +500 billion gov spending
4 x 100 = -400 billion tax
500 - 400 = 100 billion