1.If the size of the government sector is reduced by reducing both government spending and taxes, so that the budget is balanced but government just gets smaller, what will happen?

A. The economy will expand

B. The economy will shrink

C. The Public Debt will go down

D. The economy will not be affected

2.

• Indicate all of the following statements that are true:

A. The marginal propensity to consume (MPC, or c') can be greater than 1

B. If the MPC is equal to 0.85, the MPS (marginal propensity to save, or s') is equal to 0.15

• The simple multiplier is the reciprocal of the savings rate

A. The tax multiplier is larger than the simple multiplier

B. The balanced budget multiplier is equal to 1

3.The tax multiplier is smaller than the simple multiplier. What is the best explanation for the difference between these two multipliers?

A. When households and businesses have their taxes reduced, the part of the tax reduction that is saved does not immediately create new incomes

B. When households and businesses have their taxes reduced, they generally spend much more than they had planned to spend and this increase in demand creates inflation

C. When households and businesses have their taxes reduced, the resulting increase in the government deficit causes growth to slow down throughout the economy

4.New government deficit spending this year is $300 billion. If the marginal propensity to consume is 0.90, what should be the increase in national incomes?

A. $300B 0.90 = $333.3B

B. $300B x 0.90 = $270.0B

C. $300B 0.10 = $3,000B

D. $300B x 0.10 = $30.0B

5. The government wants to use a tax reduction to stimulate the economy. The marginal propensity to consume is 0.95. If aggregate taxes are reduced by $100 billion, what should be the growth in national incomes?

A. -(-$100B) 0.05 = $2,000B

B. -(-$100B) 0.95 = $105.26B

C. -(-$100B) x [0.05/0.95] = $5.26B

D. -(-$100B) x [0.95/0.05] = $1,900B