In an economy tending to produce below its maximum potential output in a year, the government steps up its expenditure by 10 percent but leaves all tax rates unchanged. Which of the following consequences of this would necessarily follow? (A) The fiscal deficit will necessarily increase by exactly the same amount as the increase in expenditure (B) If the fiscal deficit was otherwise going to be 5 percent of GDP in the absence of the stepping up of expenditure, it would increase to 5·5 percent (C) If the government expenditure to GDP ratio was otherwise going to be 25 percent of GDP in the absence of the stepping up of expenditure, it would increase to 27·5 percent (D) None of the above

1 mark, −0.25MacroeconomicsFiscal and monetary policy effectivenessFiscal policy, stabilisers and Ricardian equivalenceHardabout 3 min

JNU SSS 2018 Question 39: Fiscal and monetary policy effectiveness

In an economy tending to produce below its maximum potential output in a year, the government steps up its expenditure by 10 percent but leaves all tax rates unchanged. Which of the following consequences of this would necessarily follow?

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Fiscal and monetary policy effectiveness has come up 30 times in 7 exams since 2010.

What this question tests

This question is on Fiscal policy, stabilisers and Ricardian equivalence, part of Fiscal and monetary policy effectiveness in Macroeconomics.

The tools of fiscal policy, how the budget stabilises the economy on its own, and when deficits do not matter.

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Practise Fiscal and monetary policy effectiveness More on Fiscal policy, stabilisers and Ricardian equivalence

JNU SSS 2018 Question 39: Fiscal and monetary policy effectiveness

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Answer and worked solution

Checking your account…

Fiscal and monetary policy effectiveness has come up 30 times in 7 exams since 2010.

What this question tests

This question is on Fiscal policy, stabilisers and Ricardian equivalence, part of Fiscal and monetary policy effectiveness in Macroeconomics.

The tools of fiscal policy, how the budget stabilises the economy on its own, and when deficits do not matter.

TestStop has 17 past-paper questions on this subtopic.

Practise Fiscal and monetary policy effectiveness More on Fiscal policy, stabilisers and Ricardian equivalence

JNU SSS 2018 Question 39: Fiscal and monetary policy effectiveness

Answer and worked solution

What this question tests

Similar questions from other papers

JNU SSS 2018 Question 39: Fiscal and monetary policy effectiveness

Answer and worked solution

What this question tests

Similar questions from other papers