AP Macroeconomics Flashcards: Fiscal Policy

What this deck covers

This deck focuses on Fiscal Policy, giving you a quick way to review the definitions, rules, and examples that matter most for AP Macroeconomics.

How to use these flashcards

Work through these flashcards in short sessions. Try to answer each prompt before flipping the card, then revisit any cards you miss until the explanation feels automatic.

Flashcard 1: Identify the equation for the fiscal multiplier.

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

Flashcard 2: What is crowding out effect?

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

Flashcard 3: What is a budget deficit?

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

Flashcard 4: What is contractionary fiscal policy?

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

Flashcard 5: How can fiscal policy address unemployment?

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

Flashcard 6: What is a structural deficit?

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

Flashcard 7: What indicates a contractionary fiscal stance?

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

Flashcard 8: What is fiscal sustainability?

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

Flashcard 9: What is a budget surplus?

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

Flashcard 10: Which fiscal policy tool involves altering tax rates?

Answer: Taxation. Affects disposable income and consumption patterns.

Flashcard 11: What is the primary fiscal policy tool for recession?

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

Flashcard 12: How does government borrowing impact interest rates?

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

Flashcard 13: What is crowding out effect?

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

Flashcard 14: How does government borrowing impact interest rates?

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

Flashcard 15: What is the Ricardian equivalence?

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

Flashcard 16: What is fiscal policy?

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

Flashcard 17: What is the fiscal policy time lag?

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

Flashcard 18: How does fiscal policy affect national debt?

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

Flashcard 19: Identify a factor that affects fiscal policy effectiveness.

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

Flashcard 20: What does MPC stand for in fiscal policy?

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

Flashcard 21: What is the primary goal of fiscal policy?

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

Flashcard 22: When is fiscal policy considered contractionary?

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

Flashcard 23: What is a budget deficit?

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

Flashcard 24: What is the Ricardian equivalence?

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

Flashcard 25: Which fiscal policy tool involves altering tax rates?

Answer: Taxation. Affects disposable income and consumption patterns.

Flashcard 26: What is the primary fiscal policy tool for recession?

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

Flashcard 27: How does fiscal policy affect the aggregate demand curve?

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

Flashcard 28: What is a cyclical deficit?

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

Flashcard 29: Which fiscal policy tool involves government expenditure?

Answer: Government spending. Direct injection of money into the economy.

Flashcard 30: What indicates an expansionary fiscal stance?

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

Flashcard 31: How can fiscal policy address unemployment?

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

Flashcard 32: What is expansionary fiscal policy?

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

Flashcard 33: What is fiscal drag?

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

Flashcard 34: What is discretionary fiscal policy?

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

Flashcard 35: When is fiscal policy considered expansionary?

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

Flashcard 36: What is the impact of fiscal policy on inflation?

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

Flashcard 37: What is contractionary fiscal policy?

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

Flashcard 38: What indicates a contractionary fiscal stance?

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

Flashcard 39: What is fiscal drag?

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

Flashcard 40: What is the balanced budget multiplier?

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

Flashcard 41: When is fiscal policy considered expansionary?

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

Flashcard 42: What is the fiscal policy time lag?

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

Flashcard 43: What is the role of fiscal policy in a recession?

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

Flashcard 44: What is the balanced budget multiplier?

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

Flashcard 45: What is the impact of fiscal policy on inflation?

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

Flashcard 46: What is the role of fiscal policy in an overheating economy?

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

Flashcard 47: What is a balanced budget?

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

Flashcard 48: What is a cyclical deficit?

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

Flashcard 49: What is a supply-side effect of fiscal policy?

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

Flashcard 50: Which fiscal policy tool involves government expenditure?

Answer: Government spending. Direct injection of money into the economy.

Flashcard 51: When is fiscal policy considered contractionary?

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

Flashcard 52: What is deficit financing?

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

Flashcard 53: How does fiscal policy affect the aggregate demand curve?

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

Flashcard 54: What are the two main types of fiscal policy?

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