AP Macro - Fiscal Policy Quiz

An expansionary fiscal policy would be the one that:

• Lowers both government spending and taxes.

• Raises both government spending and taxes.

• Raises government spending and/or lowers taxes.

• Raises tax rates.

Suppose the current rate of inflation is about 14% and there is an inflationary gap of $150 billion in the economy. Which of the following policies would be most appropriate to reduce inflation if the marginal propensity to save (MPS) is equal to 0.05.

• Reduce government spending by $30 billion

• Reduce government spending by $25 billion

• Reduce government spending by $150 billion

• Reduce government spending by $7.5 billion

A reduction in the tax rates may not stimulate the economy if:

• The tax cut is permanent and raises permanent disposable income.

• The tax cut is temporary and does not change permanent disposable income.

• The tax cut is too large.

• Consumption decisions are based solely on current income as opposed to permanent income.

The federal government notices the economy is heading into a recession, and determines to engage in expansionary fiscal policy. However, six months later, when the policy is enacted the economy is enjoying very low unemployment. What happens?

• The economy must still be in a recession, since it's been only six months, so the expansionary policy will pull the economy out of the recession.

• The expansionary policy causes an initial increase in AD, which leads to a decrease in AS.

• The expansionary policy causes the price level to fall.

• The expansionary fiscal policy shifts the long-run AS curve to the right.

• The expansionary fiscal policy shifts the long-run AS curve to the left.

Fiscal policy that increases real GDP is called:

• Expansionary.

• Contractionary.

• Monetary policy.

• Neutral.

• Inflationary.

If the economy is near full employment, AD/AS analysis says expansionary fiscal policy will cause:

• An increase in real GDP.

• Unemployment.

• Rapid real growth.

• Inflation.

• A recession.

In AD/AS analysis, fiscal policy affects the economy through

• The AS curve.

• The AD curve.

• Both the AS and AD curves.

• Neither the AS nor the AD curves.

• Fiscal policy doesn't affect the economy in AS/AD analysis.

When the government runs a deficit, it must borrow money to cover its excess spending. The government borrows money by:

• Printing more money

• Issuing loans in the form of T-bonds.

• Going to normal banks.

• Selling assets.

• Going to the world bank.

When the government borrows money, private borrowing decreases. This is called:

• Crowding out.

• Discretionary.

• Fiscal.

• Debt.

• All the above.