Fiscal Policy Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fiscal Policy flashcards as text
Which of the following would most likely cause the government spending multiplier to be smaller than predicted by simple Keynesian theory?
Answer: Significant crowding out of private investment
Crowding out reduces private investment as interest rates rise, partially or fully offsetting the expansionary effect of government spending.
In a recessionary gap, appropriate fiscal policy would involve:
Answer: Cutting taxes and/or increasing government spending to boost AD
A recessionary gap means output is below potential, so expansionary fiscal policy is needed to shift AD rightward toward full employment.
The balanced budget multiplier states that equal increases in government spending and taxes will result in:
Answer: An increase in GDP equal to the amount of the spending increase
The balanced budget multiplier equals 1, so GDP rises by exactly the amount of the spending increase even when financed by an equal tax hike.
Which of the following best describes the concept of Ricardian equivalence?
Answer: Rational consumers save any tax cut because they anticipate future tax hikes to repay the debt
Ricardian equivalence argues that rational households offset tax cuts by saving more, expecting taxes will eventually rise to pay off the resulting debt.
Which of the following is NOT a recognized lag in the implementation of fiscal policy?
Answer: Administrative lag — time for the Federal Reserve to act
The administrative lag in monetary policy refers to the Fed's decision-making process; fiscal policy has recognition, legislative, and impact lags — not an administrative Fed lag.
If MPC = 0.75, what is the value of the tax multiplier?
Answer: -3
The tax multiplier = -MPC/(1-MPC) = -0.75/0.25 = -3, meaning a $1 tax increase reduces GDP by $3.
Transfer payments such as Social Security benefits are considered part of fiscal policy because they:
Answer: Affect disposable income and thus consumer spending and aggregate demand
Transfer payments increase household disposable income, which raises consumption spending and shifts the AD curve rightward.