Fiscal Policy - AP Macroeconomics

1. Identify the equation for the fiscal multiplier.

   $\text{Multiplier} = \frac{1}{1 - MPC(1 - t)}$. Accounts for tax rate effects on spending multiplier.

2. What is crowding out effect?

   Increased government spending leads to reduced private sector investment. Occurs when government borrowing raises interest rates.

3. What is a budget deficit?

   When government spending exceeds government revenue. Requires government borrowing to finance the shortfall.

4. What is contractionary fiscal policy?

   Decreases in government spending or increases in taxes to reduce inflation. Used during periods of high inflation or economic overheating.

5. What is a structural deficit?

   A budget deficit that persists even at full employment. Reflects underlying fiscal imbalance independent of economic cycle.

6. What is fiscal sustainability?

   Ability to maintain current fiscal policy without future fiscal crisis. Ensures long-term fiscal health without unsustainable debt growth.

7. What is a budget surplus?

   When government revenue exceeds government spending. Indicates government is collecting more than it spends.

8. Which fiscal policy tool involves altering tax rates?

   Taxation. Affects disposable income and consumption patterns.

9. How does government borrowing impact interest rates?

   May increase interest rates due to higher demand for loanable funds. Increased borrowing raises demand for loanable funds.

10. What is the Ricardian equivalence?

    Theory that suggests government borrowing does not affect demand. People save expecting future taxes to repay government debt.

11. What is fiscal policy?

    Government use of spending and taxation to influence the economy. Key macroeconomic tool used to manage economic cycles.

12. How does fiscal policy affect national debt?

    Increases national debt if financed through borrowing. Deficit spending adds to accumulated government debt.

13. Identify a factor that affects fiscal policy effectiveness.

    The size of the fiscal multiplier. Larger multipliers increase policy impact on GDP.

14. What does MPC stand for in fiscal policy?

    Marginal Propensity to Consume. Key component in calculating fiscal multiplier effects.

15. What is the primary goal of fiscal policy?

    To manage economic activity and achieve macroeconomic objectives. Includes goals like stable growth, low unemployment, and price stability.

16. When is fiscal policy considered contractionary?

    When it aims to decrease aggregate demand. Cools economic activity through reduced spending or higher taxes.

17. What is the primary fiscal policy tool for recession?

    Expansionary fiscal policy. Stimulus spending boosts aggregate demand during downturns.

18. What is a cyclical deficit?

    A budget deficit that occurs due to economic downturns. Temporary deficit caused by reduced economic activity.

19. What indicates an expansionary fiscal stance?

    Decrease in taxes or increase in government spending. Increases aggregate demand to stimulate economic activity.

20. How can fiscal policy address unemployment?

    Through expansionary measures to boost demand and job creation. Stimulus spending creates jobs and increases labor demand.

21. What is expansionary fiscal policy?

    Increases in government spending or decreases in taxes to stimulate the economy. Used during recessions to boost aggregate demand.

22. What is discretionary fiscal policy?

    Deliberate changes in government spending and taxes by policymakers. Requires legislative action to implement changes.

23. What is the impact of fiscal policy on inflation?

    Can either increase or decrease inflation depending on policy stance. Expansionary policy may increase, contractionary may decrease inflation.

24. What indicates a contractionary fiscal stance?

    Increase in taxes or decrease in government spending. Reduces aggregate demand to cool economic activity.

25. What is fiscal drag?

    Reduction in aggregate demand due to progressive taxation. Higher incomes push taxpayers into higher tax brackets.

26. What is the balanced budget multiplier?

    The change in output when government spending and taxes are equal. Equal increases in spending and taxes have net positive effect.

27. When is fiscal policy considered expansionary?

    When it aims to increase aggregate demand. Stimulates economic activity through higher spending or lower taxes.

28. What is the fiscal policy time lag?

    Delay between policy implementation and its effects on the economy. Recognition, implementation, and impact lags reduce effectiveness.

29. What is the role of fiscal policy in a recession?

    To stimulate economic growth and reduce unemployment. Counter-cyclical policy to restore full employment.

30. What is the role of fiscal policy in an overheating economy?

    To slow down economic growth and reduce inflation. Contractionary measures prevent excessive inflation.

31. What is a balanced budget?

    When government spending equals government revenue. Neither surplus nor deficit in government finances.

32. What is a supply-side effect of fiscal policy?

    Impact on productivity and potential output. Infrastructure spending can enhance long-term productivity.

33. Which fiscal policy tool involves government expenditure?

    Government spending. Direct injection of money into the economy.

34. What is deficit financing?

    Government borrowing to cover a budget deficit. Government issues bonds to fund spending above revenue.

35. How does fiscal policy affect the aggregate demand curve?

    Shifts the aggregate demand curve. Changes aggregate demand through spending and tax adjustments.

36. What are the two main types of fiscal policy?

    Expansionary and contractionary fiscal policies. Categorized by their effect on economic activity.

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