Question

1. The ratio of the change in GDP to an initial change in aggregate spending is the:

	a.	permanent income rate.
	b.	marginal expenditure rate.
	c.	spending multiplier.
	d.	marginal propensity to consume.

2. Crowding out occurs when increased public expenditure diverts resources away from the private sector.

True

False

3. Expansionary fiscal policy is implemented to address the problem of inflation

True

False

4. When the unemployment rate is high, the government should pursue expansionary fiscal policy and increase government spending

True

False

Answer 1

1. Ans: c ) spending multiplier.

Explanation:

Spending Multiplier. = Change in GDP / Change in initial aggregate spending

2. Ans: True

3. Ans: False

Explanation:

Government adopts contractionary fiscal policy to address the problem of inflation and expansionary fiscal policy to address the problem of recession or deflation.

4. True

Explanation:

Expansionary fiscal policy refers to increase in government spending and reduction in tax rates. In order to reduce unemployment in the economy , the government should pursue expansionary fiscal policy and increase government spending.