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
During an inflationary gap, which fiscal policy action would most directly reduce aggregate demand?
Answer: Increasing personal income tax rates
Higher income taxes reduce disposable income, lowering consumer spending and shifting the AD curve leftward to close an inflationary gap.
Which of the following statements about the national debt is most accurate in the AP Macroeconomics framework?
Answer: The national debt is the cumulative total of all past budget deficits minus surpluses
The national debt accumulates over time as each year's deficit adds to it and each surplus reduces it.
If the government wants to use fiscal policy to combat stagflation (high inflation + high unemployment), the challenge is that:
Answer: Expansionary policy worsens inflation while contractionary policy worsens unemployment
Stagflation presents a policy dilemma because stimulating the economy to reduce unemployment would worsen inflation, and fighting inflation would increase unemployment.
Which of the following best explains why economists say fiscal policy has an 'impact lag'?
Answer: It takes time for newly enacted spending to actually flow through the economy
Even after legislation is passed, it takes time for the actual government spending to be appropriated, contracted, and spent in the economy.
Which of the following would shift the aggregate supply curve rather than the aggregate demand curve in response to a fiscal policy change?
Answer: A cut in capital gains taxes that incentivizes new business investment
A capital gains tax cut reduces the cost of investment, encouraging more productive capacity and shifting the long-run aggregate supply curve rightward.
In the context of fiscal policy, 'crowding in' refers to:
Answer: Higher government spending that stimulates private investment by raising economic output and confidence
Crowding in occurs when government spending boosts overall economic activity enough that private firms increase investment in response to stronger demand.
When economists refer to 'debt monetization,' they mean:
Answer: The central bank purchases government bonds, effectively creating new money
Debt monetization occurs when the central bank buys government securities, expanding the monetary base and potentially causing inflation.