Answer to Question #137203 in Macroeconomics for December

Question

39. Suppose the economy of South Africa is experiencing rapid increase of price level. The economy is at equilibrium at an income level of R950 billion, which is above the full-employment level of income (Yf) of R900 billion. The marginal propensity to consume is 0,75. If the government wishes to close the income gap and slow down the increase in the price level, it should…

[1] cut its spending by R50 billion.

[2] cut its spending by R200 billion.

[3] raise its spending by R50 billion.

[4] cut its spending by R12,5 billion.

40. Fiscal policy includes…

a) policy on government spending on official travel allowances of politicians.

b) policy on consumption taxes such as those on cigarettes.

c) policy on salaries paid to government employees and politicians.

[1] a and b

[2] b and c

[3] b

[4] a, b and c

Answer 1

39. If the government wishes to close the income gap and slow down the increase in the price level, it should cut its spending by 50×(1 - 0.75) = R12,5 billion.

40. Fiscal policy includes policy on government spending on official travel allowances of politicians, policy on consumption taxes such as those on cigarettes, and policy on salaries paid to government employees and politicians.

So, the correct answer is [4] a, b and c.