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 correctly compares the effects of monetary and fiscal policy on interest rates?
Answer: Expansionary fiscal policy tends to raise interest rates; expansionary monetary policy tends to lower them
Expansionary fiscal policy increases government borrowing, raising interest rates, while expansionary monetary policy increases the money supply, lowering interest rates.
Which of the following scenarios best illustrates the 'recognition lag' in fiscal policy?
Answer: Economists are uncertain whether the economy entered a recession until GDP data arrives weeks later
The recognition lag is the delay between when an economic problem actually begins and when policymakers identify it using available data.
Which of the following would most effectively offset the crowding-out effect of expansionary fiscal policy?
Answer: The central bank simultaneously conducting open market purchases to keep interest rates stable
If the central bank buys bonds (expansionary monetary policy) simultaneously, it offsets the upward pressure on interest rates caused by government borrowing, reducing crowding out.
In supply-side economics, proponents argue that tax cuts will increase tax revenue if:
Answer: The economy is on the downward-sloping portion of the Laffer curve
The Laffer curve suggests that if tax rates are already too high, cutting them can stimulate enough economic activity to actually increase total tax revenue.
If the marginal propensity to consume (MPC) is 0.8 and the government increases spending by $200 billion, what is the maximum theoretical increase in GDP?
Answer: $1,000 billion
The spending multiplier = 1/(1-MPC) = 1/0.2 = 5, so $200B × 5 = $1,000 billion increase in GDP.
Which of the following best describes 'fiscal drag'?
Answer: The slowing of economic growth caused by an automatic increase in taxes during an expansion
Fiscal drag occurs when rising incomes during economic expansions push households into higher tax brackets, automatically withdrawing purchasing power and slowing growth.
Which of the following would be considered an expansionary fiscal policy in an open economy context that also improves the trade balance?
Answer: Cutting government spending to reduce the deficit
Cutting government spending reduces the budget deficit, which can lower interest rates, reducing capital inflows, weakening the currency, and improving net exports.