REVIEW QUESTIONS
- Which of the following policies is likely to have the highest multiplier effect?
a. Tax cuts for high-income individuals during a recession.
b. Infrastructure investment during a period of growth that is financed by substantial borrowing. This borrowing, in turn, leads to a rise in interest rates.
c. Tax cuts for low-income individuals during a recession.
d. Spending on military equipment during a period of economic growth. This spending, in turn, leads to a substantial increase in the inflation rate.
2. Why might an economist be pessimistic about the potential of a stimulus proposal?
a. Data on the size of multipliers are hard to come by
b. The proposal will likely have a tough time winning political support if it conflicts with the two major parties’ ideologies.
c. In the long-run, Robert Barro hypothesizes that the long-run multiplier of most stimulus packages is zero, as government stimulus will lead to less spending by companies or individuals.
d. All of the above.
3. If President Trump increased military spending by $54 billion and decreased other types of government spend by $54 billion, and the multiplier of both policies was determined to be 0.5, how much would we expect GDP to increase during the same time period?
a. $54 billion.
b. $27 billion.
c. $10 billion.
d. $0 billion.
4. Which of the following economists would likely be most optimistic about a proposal to increase military spending during a recession to stimulate the economy?
a. Robert Barro.
b. Ben Bernanke.
c. Martin Feldstein.
d. Miguel Almunia.
