Question

(1)

Calculate the government spending multiplier if, an increase in government spending by $5 million increases real GDP by $20 million.

Group of answer choices

0.20

0.25

2

5

4

(2)

A major benefit of automatic stabilizers is that they:

Group of answer choices

guarantee a balanced budget over the course of the business cycle.

have a tendency to reduce the national debt.

moderate the effect of fluctuations in the business cycle.

require legislative review by Congress before they can be implemented.

(3)

The equilibrium level of income will fall when:

Group of answer choices

consumption spending is greater than real GDP.

saving exceed taxes.

demand exceeds supply.

inventory levels rise unexpectedly.

aggregate expenditures exceed real GDP.

(4)

Suppose in an economy, saving = $430; investment = $215; government spending = $688; taxes = $192; imports = $267; exports = $242. Which of the following statements is true in the light of the given information?

Group of answer choices

Total injections exceed total leakages by $632.

Total injections exceed total leakages by $256.

The economy will be in equilibrium, because leakages equal injections.

Total injections exceed total leakages by $686.

Total injections exceed total leakages by $306.

(5)

Suppose equilibrium income in an economy decreases by $600 as a result of a change in government spending. If the multiplier is 2, what is the change in government spending?

Group of answer choices

Government spending will decrease by $1,800.

Government spending will decrease by $600.

Government spending will decrease by $200.

Government spending will decrease by $300.

Government spending will decrease by $1,200.

Answer 1

(1) 4
(Multiplier = Change in Y/Change in G = 20/5 = 4)

(2) moderate the effect of fluctuations in the business cycle.
(Automatic stabilizers moderate fluctuations in the business cycle.)

(3) inventory levels rise unexpectedl
(When onventory rises, Y falls.)

(4) Total injections exceed total leakages by $256
(Injections = I + G + X = 215 + 688 + 242 = 1145 > Leakages = S + T + M = 430 + 192 + 267 = 889
Injection - Leakages = 1145 - 889 = 256)

(5) Government spending will decrease by $300.
(Change in G = Change in Y/Multiplier = -600/2 = -300)