AP Macro Fiscal Policy 2

Question 1

Which of the following best describes the crowding-out effect of expansionary fiscal policy?

Accepted Answer

Higher government borrowing raises interest rates, reducing private investment

Answer

When the government borrows more to finance deficit spending, it competes with private borrowers, driving up interest rates and reducing private investment.

Question 2

The cyclically adjusted budget deficit (also called the structural deficit) measures:

Accepted Answer

The deficit that would exist if the economy were at full employment

Answer

The cyclically adjusted deficit removes the effects of the business cycle to show what the deficit would be if output were at its potential level.

Question 3

Which scenario best illustrates an automatic stabilizer at work during a recession?

Accepted Answer

Unemployment insurance payments increase as more workers lose jobs

Answer

Unemployment insurance automatically pays out more during recessions without any new legislation, cushioning the fall in aggregate demand.

Question 4

If the government implements a contractionary fiscal policy, the aggregate demand curve will:

Accepted Answer

Shift leftward due to reduced spending or higher taxes

Answer

Contractionary fiscal policy reduces government spending or raises taxes, which decreases aggregate demand and shifts the AD curve left.

Question 5

A lump-sum tax change has a smaller multiplier effect on GDP than an equivalent change in government spending because:

Accepted Answer

Some portion of a tax cut is saved rather than spent

Answer

When taxes are cut, consumers save part of the increase in disposable income rather than spending it all, resulting in a smaller initial injection into the economy.

AP Practice Test

AP Practice Test

AP Macro Fiscal Policy 2