AP Macroeconomics Test 5 Review:
Fiscal and Monetary Policy Together 28 Multiple Choice Questions
2 FRQs STUDY the POWERPOINT! You can create a new document by copying and pasting if you wish to type directly into the document.

1.
Identify all possible Fiscal Policy interventions in the economy.
Government spending, government transfers increase or decrease
Taxes increase or decrease
2.

How can the national debt be defined? Accumulation of all deficit and surplus in nation’s accounting 3.
Are automatic stabilizers necessary when there is a balanced budget? Explain.
Not really­­there is a balanced budget, so G = T 4.
How would Fiscal Policy best remedy an oppressive recession? Government spending, government transfers increase or Taxes decrease 5.
Why is the Tax Multiplier smaller than the Expenditure Multiplier?
Because if there is a decrease in taxes, people will consume part of their increased disposable income but will also save a portion of it.
Remember, taxes can also increase which would certainly decrease spending. 6.
How is the Marginal Propensity to Consume calculated? Change in Consumption/Change in Disposable Income 7.
Regarding Fiscal Policy, what would cause output to increase in the short run? Decrease in T, Increases in G and Government transfers

8.
How will interest rates react if the national government decreases its budget deficit? The government is closing a recessionary gap if it is able to reduce its budget deficit close to full employment. As such, price levels would decrease. Since interest rates are prices, the interest rate would decrease. 9.
What is the Net Exports Effect of Expansionary Fiscal Policy?
Increase in G or Decrease in T yields increase in interest rate (crowding out if increase in G) yields increased Demand for Money so foreigners can invest in
U.S. (Demand for bonds increases) yields increase in the value of the dollar
(appreciation) yields decrease in Exports and increase in Imports yields decrease in Xn yields decrease in GDP. 10.
What does it mean when the federal government has a deficit? Not enough tax revenue; they must borrow if they want to spend. 11.
What is the Crowding Out Effect of fiscal policy? When G increases, AD increases and shifts Right. When AD shifts Right, the price level increases. The interest rate is a price; hence, interest rates increase. This yields a decrease in Ig and C (Investment and Consumption spending). 12.
What does it mean when the federal government engages in deficit spending? Borrowing because G > T. Deficit­spending = debt­financing = bonds.
13.

What is the relationship between the Marginal Propensity to Consume and the Expenditure Multiplier? 1/1­MPC = ME
14.

What does a horizontal Aggregate Supply Curve demonstrate? Production cannot exceed the price level, so even as production increases or decreases,