FDNECON 04 · Fiscal Policy and Output Gaps
Conventions
Original source-based practice for FDNECON Quiz #2. Questions are independent: use only each item’s complete givens. Amounts and units are stated in every numerical case. Numeric written answers omit currency symbols and units; rates are entered as numerical percentages (5 means 5%). Round only the final result to two decimals unless instructed otherwise. The course money-market diagram treats supply as vertical and policy-determined, with downward-sloping demand and other determinants fixed. Numerical money-demand equations, finite/infinite spending chains, gap percentages and multiplier/tax formulas are fully stated hypothetical practice extensions, not claims about measured Philippine outcomes or guaranteed policy effects. Expenditure and income approaches remain separate; foreign-income boundary inconsistencies in the source are explained in the reviewer. No question requires an unprovided graphic or another item’s answer.
Questions
01Which diagnosis and direction fit the course framework?
Problem
Actual GDP=₱2,850bn and potential GDP=₱3,000bn.
- Recessionary gap; expansionary fiscal support.
- No gap because both values are positive.
- Recessionary gap; cut all spending to raise demand.
- Inflationary gap; contractionary fiscal policy.
02What is the signed gap as a percentage of potential?
Problem
Actual GDP=₱2,850bn; potential GDP=₱3,000bn. Define gap %=(actual−potential)/potential×100.
- −5%
- 95%
- −5.26%
- +5%
03Which pair uses contractionary fiscal instruments?
- Lower G and higher taxes.
- Central-bank securities purchase and a tax cut.
- Higher G and lower taxes.
- Higher money supply and lower reserve ratio.
04True or false: if actual GDP is below potential, the gap itself necessarily equals the initial government-purchase increase needed to close it.
- True
- False
05What is the total of the four listed rounds only?
Problem
A hypothetical initial government purchase is ₱1,200. The next three domestic spending rounds are ₱600, ₱300 and ₱150. Count only these four rounds, including the initial purchase.
- ₱2,400
- ₱1,050
- ₱2,250
- ₱1,200
06What is the total output increase under the supplied idealized model?
Problem
Use k=1/(1−c), ΔY=kΔG. c=0.8, ΔG=+₱30bn, and assume no taxes, imports, price changes or crowding out.
- ₱120 billion
- ₱30 billion
- ₱180 billion
- ₱150 billion
07What initial spending increase closes the shortfall in this stated model?
Problem
Actual output is ₱120bn below potential. The problem supplies a spending multiplier of 3 and assumes no other effects or changes in potential output.
- ₱360 billion
- −₱40 billion
- ₱40 billion
- ₱120 billion
08What is the direct net change before further rounds?
Problem
Government purchases increase ₱60bn; higher borrowing costs reduce private investment ₱15bn. Consumption and net exports are unchanged. Calculate only the direct net expenditure change.
- +₱45 billion
- +₱60 billion
- +₱75 billion
- −₱45 billion
09Which causal chain describes crowding out in the source?
- Government borrowing → guaranteed lower rates → no possible private response.
- Government borrowing → more demand for scarce loanable funds → higher rates → weaker private investment.
- A securities sale by a central bank → all government purchases rise automatically.
- Higher taxes → all money demand disappears.
10What can be concluded about this mixed fiscal package without further information?
Problem
Government purchases and taxes both rise. Their sizes and household spending responses are not provided.
- It is automatically a monetary action.
- Net demand direction cannot be established from the purchase increase alone.
- It is always contractionary regardless of the purchase increase.
- It is always expansionary regardless of the tax increase.
11True or false: a cash transfer is directly a government purchase merely because it is paid by government.
- True
- False
12Using only the supplied model, what is ΔY?
Problem
The problem supplies ΔY=[−c/(1−c)]ΔT for lump-sum taxes. c=0.75 and taxes are cut by ₱15bn (ΔT=−15). Assume no other effects.
- −₱15 billion
- +₱45 billion
- −₱45 billion
- +₱60 billion
13Which statement correctly limits the simple multiplier result?
- It counts every resale of an existing asset as new output.
- It guarantees actual output always rises by exactly the formula in every economy.
- It creates productive resources without any constraints.
- It depends on assumptions about leakages, prices, capacity and offsets.
14Which program most directly illustrates the source’s equity/human-development objective?
- Calling every period’s GDP difference an import.
- Defining full employment as literally every person working.
- Replacing every fiscal action with a central-bank security sale.
- A targeted service program that improves access for disadvantaged households.
15Which distinction is correct?
- Potential GDP is always equal to actual GDP by definition.
- Potential GDP is a sustainable benchmark; actual GDP is measured current output.
- Actual GDP measures only prices, while potential measures only imports.
- Potential GDP is the same number as the current unemployment rate.
16Which assessment recognizes both short-run and longer-run fiscal channels?
- A well-chosen infrastructure purchase can add current demand and improve future productive capacity.
- Every purchase must change only prices and can never create output.
- All public infrastructure spending guarantees equal benefits regardless of project quality.
- A current recessionary gap proves potential output is zero.