Fiscal policy involves increasing and decreasing the money supply as defined by

Question

Fiscal policy involves increasing and decreasing the money supply as defined by GDP.

True

False

Assume that the economy is in a recession and the government wants to generate $400 billion increase in real GDP. If the MPC is .8. Which of the following policy prescriptions would do such?

A. Increase of 80 Billion in Gov't spending

B. Increase of 500 Billion in Gov't spending

C. Increase of 400 Billion in Gov't spending

D. Increase of 160 Billion in Gov't spending

Which of the following is not a macroeconomic goal of the Federal Reserve Bank

A. increase in stock market

B. stable price level

C. low unemployment

D. low inflation

Explanation / Answer

1. Fiscal policy is the strategy by which government adjusts its spending levels and tax rates to monitor and influence a nation's economy. A country's central bank uses monetary policy to influence its money supply.

FALSE

2. Increase in Real GDP = MPC * increase in government spending.

400 = 0.8 * increase in government spending

i.e. Increase in government spending has to be = 400 / 0.8 = $500 billion

OPTION B

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