AP Macroeconomics : Fiscal Policy
Study concepts, example questions & explanations for AP Macroeconomics
All AP Macroeconomics Resources
Example Questions
Example Question #1 : Fiscal Policy
Which of the following is not a part of the business cycle?
Contraction
Trough
Expansion
Plateau
Plateau
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 : Fiscal Policy
How does an increase in imports affect a nation's GDP?
An increase in imports does not affect a nation's GDP.
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.
Using the GDP equation 
Example Question #1 : Fiscal Policy
A recessionary gap occurs when __________.
potential output exceeds real output
real output exceeds potential output
nominal output exceeds potential output
real output is equal to potential output
potential output exceeds real output
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 #2 : Fiscal Policy
Which of the following is not a tool used by the Federal Reserve?
Adjusting the reserve requirements for banks
Adjusting the discount rate
Buying and selling bonds via open market operations
All of these tools are used by the Federal Reserve
Increasing aggregate demand through fiscal policy
Increasing aggregate demand through fiscal policy
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?
Government spending increases.
The Federal Reserve sells US Treasury bonds.
The tax rate increases.
The Federal Reserve buys US Treasury bonds.
Government spending increases.
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.
All AP Macroeconomics Resources
