AP Macroeconomics : How to find fiscal policy

Study concepts, example questions & explanations for AP Macroeconomics

varsity tutors app store varsity tutors android store

Example Questions

Example Question #2 : Fiscal Policy

Which of the following is not a tool used by the Federal Reserve?

Possible Answers:

Increasing aggregate demand through fiscal policy

All of these tools are used by the Federal Reserve

Buying and selling bonds via open market operations

Adjusting the reserve requirements for banks

Adjusting the discount rate

Correct answer:

Increasing aggregate demand through fiscal policy

Explanation:

Fiscal policy is the use of government spending to influence the economy. As such, fiscal policy is outside of the scope of the Federal Reserve's powers - fiscal policy can only be initiated by Congress.

Example Question #3 : Fiscal Policy

Which of the following is the most effective fiscal policy if potential GDP exceeds current GDP?

Possible Answers:

The Federal Reserve buys US Treasury bonds.

The tax rate increases.

The Federal Reserve sells US Treasury bonds.

Government spending increases.

Correct answer:

Government spending increases.

Explanation:

If potential GDP exceeds current GDP, the country is in a recessionary gap. The fiscal policies that are effective in closing a recessionary gap are to increase government spending or to decrease (not increase) taxes.

Note that Federal Reserve operations are monetary, not fiscal, policies.

Learning Tools by Varsity Tutors