Faculty of Management Technology Economics B Department

Macroeconomics (ECON403) S21 Prof. Christian Schubert

Quiz Two

Name: ____________________________________________________________________

ID: ______________________ Tutorial Number: ______________________

(I) Solve all of the following MCQs in the below table:

(1) Contractionary fiscal policy is typically required to…

(a) Close an inflationary gap
(b) Annoy people
(c) Close a recessionary gap
(d) Increase government’s revenues
(e) None of the above.

(2) “Every rise in government spending is always exactly offset by a fall in private
consumption!” That claim…
(a) Is correct
(b) Is wrong
(c) Is wrong if initially, the economy has underemployed resources
(d) Is wrong if initially, the economy operates above potential output
(e) None of the above

(3) Taxes…
(a) Reduce the size of the multiplier
(b) Increase the size of the multiplier
(c) Reduce the size of the multiplier, but only if the stimulus comes from an increase in
G
(d) Only affect the direction of the multiplier
(e) None of the above.

(4) “Sovereign default”, that describes a situation where…

(a) a government refuses to service its outstanding debt
(b) a private firm refuses to service its outstanding debt
(c) a private household refuses to service its outstanding debt
(d) historically, a king or queen misses an appointment
(e) None of the above.
 Faculty of Management Technology Economics B Department
Macroeconomics (ECON403) S21 Prof. Christian Schubert

(5) Over the last 100 years, governments around the world…
(a) Became smaller and smaller
(b) Stayed roughly the same, in terms of size
(c) Became more and more efficient
(d) Became larger and larger
(e) None of the above

(6) After the pandemic is over, prices would rise if…

(a) Falling demand meets increased supply
(b) Rising demand meets lower supply
(c) Constant demand meets constant supply
(d) Rising demand meets rising supply
(e) None of the above

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 Faculty of Management Technology Economics B Department
Macroeconomics (ECON403) S21 Prof. Christian Schubert

(II) Problem Questions

Assuming an MPC of 0.7 and an initial stimulus of $40 billion, please calculate the multiplier
and the total increase in GDP. Now, given the same initial stimulus, calculate again the
multiplier and the total increase in GDP if the government imposes a 20% income tax.