Question 1:Suppose the marginal propensity to save (MPS) is 0.25. If government expenditure goes up by $50 billion primarily via deficit financing then you can expect with some certainty that:

a) Aggregate demand in the economy will stay unchanged since this is only affected by consumer spending and not government expenditure.

b) Aggregate demand in the economy will increase by $200 billion.

c) Aggregate demand in the economy will increase by $12.5 billion.

d) Taxes will go up by $50 billion to balance the budget.

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Question 2:In the midst of a recession, an increase in government spending has a direct impact on the economy, while a cut in taxes will affect the economy in a more indirect way. This is because:

a) An increase in government spending directly adds to the economic stimulus via the consumption multiplier, while the stimulating effect of tax cuts depends on how much of those tax cuts households and individuals actually end up spending (as opposed to saving).

b) Tax cuts directly add to the economic stimulus via the consumption multiplier, while the stimulating effect of increased government spending depends on how much of those tax cuts households and individuals actually end up spending (as opposed to saving).

c) Governments have the ability to increase spending but tax cuts must be enacted by a country's central bank.

d) Because governments must always balance their books (that is budget deficit/surplus must always be zero) any tax cuts in one area must be balanced by equivalent tax increases in other areas.

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Question 3:Which of the following will have the mostexpansionaryimpact in the midst of a recession?

a) An increase in government spending of $4 billion with a marginal propensity to consume of 0.5.

b) A decrease in taxes of $4 billion with a marginal propensity to consume of 0.5.

c) An increase in government spending of $4 billion with a marginal propensity to save of 0.25.

d) An increase in government spending of $4 billion with a marginal propensity to consume of 0.25.

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Question 4:Suppose that Australia has recovered from the pandemic shock and run a budget surplus, while other major advanced economies are still facing significant uncertainty and have to continue with large budget deficits. Which of the following will most likely to happen as a result of the different fiscal performances.

a) Australia's net exports will fall.

b) The Australian dollar will appreciate.

c) Australia's exports will rise and imports will fall.

d) Australia's interest rates will rise.