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S6 Economics Fiscal Policy, Paper 4: multiplier ratios, tax bands and the balanced budget
S6 Economics Fiscal Policy, Paper 4: multiplier ratios, tax bands and the balanced budget
Ten graded items on the budget balance, spending and tax multipliers at marginal propensities of 0.6 and 0.8, tax payable, the spending and deficit ratios and the balanced budget multiplier, each with an answer.
Focus The spending multiplier is one over one minus MPC, the tax multiplier is minus MPC over one minus MPC, the balanced budget multiplier is one, and ratios divide before multiplying by 100.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 |
| Suggested time | 25 |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: S6 Economics: Fiscal Policy |
| Level | Four basic, three advanced, two challenge and one error-repair item |
02 Questions (10 items)
- FoundationGovernment revenue is $68 billion and spending is $61.5 billion. What is the budget balance?
- FoundationThe marginal propensity to consume is 0.6. Find the government spending multiplier and the rise in output from $4 billion of extra spending.
- FoundationWith a marginal propensity to consume of 0.6, find the tax multiplier and the effect on output of a $4 billion tax cut.
- FoundationAssessable income is $320,000 taxed at 17%. How much tax is payable?
- IntermediateGovernment spending is $240 billion and GDP is $600 billion. What share of GDP is government spending?
- IntermediateThe fiscal deficit is $21 billion and GDP is $700 billion. What is the deficit ratio?
- IntermediateWith a marginal propensity to consume of 0.8, compare the output effect of $5 billion more spending against a $5 billion tax cut.
- ChallengeSpending and taxes both rise by $8 billion with a marginal propensity to consume of 0.8. What is the net effect on output?
- ChallengeThe tax rate rises from 12% to 16% on assessable income of $450,000. By how much does the tax bill rise?
- Error redoError repair: a student writes that the balanced budget multiplier is zero because the tax rise fully cancels the extra spending. What is wrong?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | A surplus of $6.5 billion | Revenue minus spending is 65, and a positive figure means a surplus rather than a deficit. |
| 2 | A multiplier of 2.5 and a rise of $10 billion | The multiplier is 1 divided by 0.4, which is 2.5, and 40 times 2.5 is 100. |
| 3 | A multiplier of -1.5 and a rise of $6 billion | The tax multiplier is minus 0.6 over 0.4, which is minus 1.5, so a 4 billion cut raises output by 6 billion. |
| 4 | $54,400 | Three hundred and twenty thousand times 0.17 is 54,400. |
| 5 | 40% | 2,400 divided by 6,000 is 0.40, or 40 per cent. |
| 6 | 3% | 210 divided by 7,000 is 0.03, or 3 per cent. |
| 7 | Spending adds $25 billion while the tax cut adds $20 billion | The spending multiplier is 5 and the tax multiplier minus 4, so direct spending packs a bigger punch for the same amount. |
| 8 | A net rise of $8 billion | Spending adds 400 and the tax rise removes 320, leaving a net gain equal to the spending increase, so the balanced budget multiplier is 1. |
| 9 | From $54,000 to $72,000, a rise of $18,000 | Twelve per cent of 450,000 is 54,000 and 16 per cent is 72,000, a difference of 18,000. |
| 10 | Wrong: the balanced budget multiplier equals 1, so output still rises by the spending increase | Tax rises bite indirectly through disposable income while spending enters directly, so equal amounts leave a net gain equal to the spending increase. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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