AP Macroeconomics : Fiscal Policy

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : Real Output

Which of the following is not a part of the business cycle?

Possible Answers:

Expansion

Plateau

Trough

Contraction

Correct answer:

Plateau

Explanation:

The four phases of the business cycle are expansion, peak, contraction, and trough. A plateau is not one of these four phases.

Example Question #1 : Real Output

How does an increase in imports affect a nation's GDP?

Possible Answers:

An increase in imports decreases a nation's GDP. 

An increase in imports raises a nation's GDP.

An increase in imports does not affect a nation's GDP.

Correct answer:

An increase in imports does not affect a nation's GDP.

Explanation:

Using the GDP equation , we see that any imports will be added to either Consumption or Investment, but will be subtracted from Net Exports by the same amount. This leads to a net change of zero. 

Example Question #1 : Real Output

A recessionary gap occurs when __________.

Possible Answers:

real output is equal to potential output

real output exceeds potential output

nominal output exceeds potential output

potential output exceeds real output

Correct answer:

potential output exceeds real output

Explanation:

A recessionary gap is defined as a situation in which real output is below potential output. In other words, the economy could be producing more than it is.

The answer choice "real output exceeds potential output" is incorrect; it describes an inflationary gap.

The answer choice "nominal output exceeds potential output" is incorrect; inflationary and recessariony gaps refer to real output levels, not nominal levels.

 

Example Question #3 : Fiscal Policy

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

Possible Answers:

Buying and selling bonds via open market operations

All of these tools are used by the Federal Reserve

Increasing aggregate demand through fiscal policy

Adjusting the discount rate

Adjusting the reserve requirements for banks

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 #1 : Fiscal Policy

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

Possible Answers:

Government spending increases.

The tax rate increases.

The Federal Reserve buys US Treasury bonds.

The Federal Reserve sells US Treasury bonds.

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.

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