Fiscal Policy Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fiscal Policy flashcards as text
Which of the following best describes the crowding-out effect of expansionary fiscal policy?
Answer: Higher government borrowing raises interest rates, reducing private investment
When the government borrows more to finance deficit spending, it competes with private borrowers, driving up interest rates and reducing private investment.
The cyclically adjusted budget deficit (also called the structural deficit) measures:
Answer: The deficit that would exist if the economy were at full employment
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.
Which scenario best illustrates an automatic stabilizer at work during a recession?
Answer: Unemployment insurance payments increase as more workers lose jobs
Unemployment insurance automatically pays out more during recessions without any new legislation, cushioning the fall in aggregate demand.
If the government implements a contractionary fiscal policy, the aggregate demand curve will:
Answer: Shift leftward due to reduced spending or higher taxes
Contractionary fiscal policy reduces government spending or raises taxes, which decreases aggregate demand and shifts the AD curve left.
A lump-sum tax change has a smaller multiplier effect on GDP than an equivalent change in government spending because:
Answer: Some portion of a tax cut is saved rather than spent
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.
Which of the following is an example of discretionary fiscal policy?
Answer: Congress passing a $500 billion economic stimulus act
Discretionary fiscal policy requires a deliberate legislative action, such as Congress enacting a new spending or tax law.
When the government runs a budget surplus, it can use the surplus to:
Answer: Pay down existing national debt, reducing future interest obligations
A budget surplus means revenue exceeds spending; the government can use the extra funds to retire outstanding debt, reducing future interest payments.