AP Macroeconomics : How to find the effect of deficit spending on output

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : How To Find The Effect Of Deficit Spending On Output

According to Keynesian Economics, which of the following would weaken the multiplier effect?

Possible Answers:

An increase in interest rates

High velocity of money

Selling government bonds

An increase in government spending

Correct answer:

An increase in interest rates

Explanation:

The correct answer is that an increase in interest rates would weaken the multiplier effect. The reason is that an increase in interest rates would make it more attractive for consumers to save money, so as a result, there would be less of a propensity to consume.

Example Question #2 : Ap Macroeconomics

Which of these is a negative aspect of a law mandating a balanced budget?

Possible Answers:

It leads to increasingly high taxes. 

It is pro-cyclical (makes the business cycle more severe)

It leads to fluctuating tax rates. 

It creates excess funds for public projects. 

Correct answer:

It is pro-cyclical (makes the business cycle more severe)

Explanation:

A balanced budget law is pro-cyclical because when the economy enters a recession (GDP decreases), the amount of production the government is able to tax decreases, leading to a decrease in government revenue. The government is unable to spend at a deficit, so the government must decrease expenditures. Government expenditures make up a substantial portion of GDP, so GDP decreases even more. 

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