AP Macro Fiscal Policy 3

Question 1

Which of the following would most likely cause the government spending multiplier to be smaller than predicted by simple Keynesian theory?

Accepted Answer

Significant crowding out of private investment

Answer

Crowding out reduces private investment as interest rates rise, partially or fully offsetting the expansionary effect of government spending.

Question 2

In a recessionary gap, appropriate fiscal policy would involve:

Accepted Answer

Cutting taxes and/or increasing government spending to boost AD

Answer

A recessionary gap means output is below potential, so expansionary fiscal policy is needed to shift AD rightward toward full employment.

Question 3

The balanced budget multiplier states that equal increases in government spending and taxes will result in:

Accepted Answer

An increase in GDP equal to the amount of the spending increase

Answer

The balanced budget multiplier equals 1, so GDP rises by exactly the amount of the spending increase even when financed by an equal tax hike.

Question 4

Which of the following best describes the concept of Ricardian equivalence?

Accepted Answer

Rational consumers save any tax cut because they anticipate future tax hikes to repay the debt

Answer

Ricardian equivalence argues that rational households offset tax cuts by saving more, expecting taxes will eventually rise to pay off the resulting debt.

Question 5

Which of the following is NOT a recognized lag in the implementation of fiscal policy?

Accepted Answer

Administrative lag — time for the Federal Reserve to act

Answer

The administrative lag in monetary policy refers to the Fed's decision-making process; fiscal policy has recognition, legislative, and impact lags — not an administrative Fed lag.

AP Practice Test

AP Practice Test

AP Macro Fiscal Policy 3