Q: Suppose the Canadian government increases its spending by $10 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total increase in real GDP according to the simple multiplier formula?

$$ \frac{1}{1-0.8} \times 10 \text{ billion} = 50 \text{ billion} $$

Question 1

Which of the following best describes the main goal of expansionary fiscal policy in the context of the aggregate demand/aggregate supply model?

Accepted Answer

To increase aggregate demand and close a recessionary gap

Question 2

Suppose the Canadian government increases its spending by $10 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total increase in real GDP according to the simple multiplier formula?

Accepted Answer

$$ \frac{1}{1-0.8} 	imes 10 	ext{ billion} = 50 	ext{ billion} $$

Question 3

Which of the following is a likely consequence of the crowding-out effect when the government increases deficit spending?

Accepted Answer

Interest rates increase, reducing private investment

Question 4

If the government runs a budget deficit, which of the following statements is correct regarding the relationship between the deficit and public debt?

Accepted Answer

The deficit is the difference between government revenue and spending in a given year, while debt is the accumulation of all past deficits

Question 5

Which of the following best explains the net export effect of deficit spending in Canada?

Accepted Answer

Deficit spending raises interest rates, causing the Canadian dollar to appreciate and net exports to fall

Question 6

According to the Ricardian equivalence theorem, what is the expected effect of an increase in the government budget deficit on aggregate demand?

Accepted Answer

Aggregate demand remains unchanged because people discount future tax liabilities

Question 7

Which of the following is an example of an automatic stabilizer in the Canadian economy?

Accepted Answer

Progressive income tax system

Question 8

What is the main difference between gross public debt and net public debt?

Accepted Answer

Net public debt is gross debt minus the value of financial assets held by government agencies

Question 9

Which of the following fiscal policy options would most likely be used to close an expansionary gap?

Accepted Answer

Decrease government spending

Question 10

Suppose the government recognizes a recession and decides to implement expansionary fiscal policy. Which time lag is most likely to delay the impact of this policy?

Accepted Answer

Action time lag

Question 11

If the government increases its spending by $5 billion and the MPC is 0.75, what is the value of the simple multiplier?

Accepted Answer

$$ \frac{1}{1-0.75} = 4 $$

Question 12

Which of the following is a supply-side policy that could shift the aggregate supply curve to the right?

Accepted Answer

Reducing income tax rates to incentivize productivity

Question 13

In an open economy, what is the likely effect of increased government borrowing on the current account balance?

Accepted Answer

It leads to a current account deficit due to capital inflows

Question 14

Which of the following best describes the effect time lag in fiscal policy?

Accepted Answer

The time that elapses between the onset of policy and the results of that policy

Question 15

If local and provincial governments cannot finance deficits and their spending is pro-cyclical, what is the likely effect on federal government fiscal policy?

Accepted Answer

It offsets the effectiveness of federal fiscal policy

Question 16

Which of the following is NOT a discretionary fiscal policy option available to the government?

Accepted Answer

Progressive income tax system

Question 17

If the government revenue is $$200 billion and government spending is 220 $$billion, what is the budget balance?

Accepted Answer

$$ 200 	ext{ billion} - 220 	ext{ billion} = -20 	ext{ billion}  ($$deficit)

Question 18

Which of the following scenarios illustrates the use of contractionary fiscal policy?

Accepted Answer

The government decreases spending to reduce inflation

Question 19

Which of the following is a plausible reason why fiscal policy may not always be effective in closing GDP gaps?

Accepted Answer

Crowding out, direct expenditure offsets, and time lags

Fiscal Policy and Public Debt: Macroeconomic Study Notes

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