MEcon Master of Economics Public Finance and Fiscal Policy 1

Question 1

Automatic stabilizers in fiscal policy are government programs that:

Accepted Answer

Automatically increase spending or cut taxes during recessions without new legislation

Answer

Automatic stabilizers like unemployment insurance and progressive taxes automatically inject demand in downturns and withdraw it in booms without requiring discretionary action.

Question 2

The Ricardian Equivalence proposition suggests that deficit financing of government spending:

Accepted Answer

Has no effect on aggregate demand because households save the tax cut to pay future taxes

Answer

Ricardo-Barro equivalence holds that rational households, anticipating future taxes to repay debt, save an equal amount when taxes are cut today, leaving aggregate demand unchanged.

Question 3

A progressive income tax system is one in which the marginal tax rate:

Accepted Answer

Rises as income rises

Answer

Under a progressive system, additional income is taxed at successively higher marginal rates, causing the average tax rate to rise with income.

Question 4

The concept of 'fiscal multiplier' refers to the ratio of:

Accepted Answer

Change in GDP to the initial change in government expenditure

Answer

The fiscal multiplier measures how much total output changes relative to a given change in fiscal policy; a multiplier greater than one means stimulus has an amplified effect.

Question 5

A Pigouvian tax is designed to correct for:

Accepted Answer

Negative externalities by making the polluter internalize social costs

Answer

A Pigouvian tax equal to the marginal social damage of an externality shifts the private cost curve up to equal the social cost curve, restoring the efficient output level.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Public Finance and Fiscal Policy 1