AP Macroeconomics : Deficit Spending

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : Ap Macroeconomics

At the beginning of a specified fiscal year, the national debt is equal to $1000. At the end of the fiscal year, the national deficit is equal to $100. The national debt at the end of the fiscal year is equal to ________.

Possible Answers:

$1000

$900

$1100

$100

Correct answer:

$1100

Explanation:

The national debt is the accumulation of national deficits, tabulated every fiscal year.

Therefore, if the national debt at the beginning of the year is $1000 and the deficit for that year is $100, the accumulated nation deficit is $1000+$100=$1100.

If you selected $900, you may have subtracted the deficit that year rather than adding it.

If you selected $100, you may have mistaken the national deficit for the national debt.

If you selected $1000, you may have forgotten to include the new deficit of $100 into the calculation of national debt.

Example Question #2 : Ap Macroeconomics

The British economist who notably advocated deficit spending in order to pull a nation out of a recession or depression is _________.

Possible Answers:

Alfred Marshall

Carl Menger

William Stanley Jevens

John Maynard Keynes

Adam Smith

Correct answer:

John Maynard Keynes

Explanation:

John Maynard Keynes began arguing forcefully in the 1920s that spending in a deficit would actually help a country get out of an economic depression. The Great Depression of the 1930s saw many governments put Keynes' theories to the test, often with economic success. This time period is often known as the Keynesian Revolution.

Example Question #1 : Deficit Spending

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

Possible Answers:

An increase in government spending

High velocity of money

Selling government bonds

An increase in interest rates

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

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. 

Example Question #1 : Deficit Spending

If the economy is in severe recession, which of the following fiscal policies would a Keynesian economist most likely recommend?

Possible Answers:

An increase in personal income taxes in order to help balance the budget.

An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.

A decrease in government spending in order to offset the decrease in tax revenues that result from an economy in recession.

A decrease in government transfer payments.

Correct answer:

An increase in government spending on public infrastructure, even if this spending results in greater budget deficits.

Explanation:

The correct answer is that a Keynesian Economist would be most likely to advocate increased spending on public infrastructure if the economy was in recession, even if such an increase results in an increase in budget deficits.

The reason for this is that the Keynesians believe that such an increase in public works spending will lead to an increase in aggregate demand.

 

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