From a Keynesian perspective, the appropriate fiscal policy to deal with this: a

Question

From a Keynesian perspective, the appropriate fiscal policy to deal with this: a. recessionary gap is to increase government spending and/or reduce taxes. b. recessionary gap is to decrease government spending and/or raise taxes. c. inflationary gap is to increase government spending and/or reduce taxes. d. inflationary gap is to decrease government spending and/or raise taxes. In the simple Keynesian model with government spending (G) and lump-sum taxes (T), the tax multiplier is equal to a. -MPC/MPS b. -MPS/MPC c. 1/MPC d. 1/MPS In the simple Keynesian model, when the MPC is 0.8. the autonomous spending multiplier is and the tax multiplier is a. 5;4 b. 5;5 c. 4;-4 d. 5;-4 Assume the government cuts taxes by $125 billion. If the MPC = 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model? a. Real GDP increases by $500 billion b. Real GDP increases by $625 billion c. Real GDP decreases by $500 billion d. Real GDP decreases by $625 billion

Explanation / Answer

1. d. inflationary gap is to decrease government spending and/or raise taxes.

2. a. -MPC/MPS

3. d. 5; -4

(Spending multiplier = 1/0.2 = 5; Tax multiplier = -0.8/0.2 = -4)

4. a. Real GDP increases by $500 billion.

($125 billion x 4 (tax multiplier) = $500 billion)

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