Check Your Understanding

1. Question

   Explain why a $500 million increase in government purchases of goods and services will generate a larger rise in real GDP than a $500 million increase in government transfers.

2. Question

   Explain why the tax multiplier is smaller than the spending multiplier for a decrease in government purchases.

3. Question

   The country of Boldovia has no unemployment insurance benefits and a tax system that uses only lump-sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system in which residents must pay a percentage of their income. Which country will experience greater variation in real GDP in response to demand shocks, positive and negative? Explain.