AP Macroeconomics Fiscal Policy Quiz: Test Your Knowledge

📚 Quick Study Guide

• 💰 Fiscal Policy: Government's use of spending and taxation to influence the economy.
• ⬆️ Expansionary Fiscal Policy: Increases government spending or decreases taxes to increase aggregate demand. Often used during recessions.
• ⬇️ Contractionary Fiscal Policy: Decreases government spending or increases taxes to decrease aggregate demand. Used to combat inflation.
• ⚖️ Budget Deficit: Occurs when government spending exceeds tax revenue ($Spending > Taxes$).
• 🧾 Budget Surplus: Occurs when tax revenue exceeds government spending ($Taxes > Spending$).
• 📈 Multiplier Effect: The proportional increase (or decrease) in final income that results from an injection (or withdrawal) of spending. Formula: $Multiplier = \frac{1}{1-MPC}$, where MPC is the marginal propensity to consume.
• 🏦 Automatic Stabilizers: Fiscal policies that automatically adjust to stabilize the economy (e.g., unemployment benefits).

🧪 Practice Quiz

1. Which of the following is an example of expansionary fiscal policy?
   1. Increasing interest rates
   2. Decreasing government spending
   3. Increasing taxes
   4. Decreasing taxes
2. If the government increases spending by $200 billion and the MPC is 0.75, what is the maximum possible increase in aggregate demand?
   1. $200 billion
   2. $600 billion
   3. $800 billion
   4. $1000 billion
3. What is the primary goal of contractionary fiscal policy?
   1. To increase employment
   2. To stimulate economic growth
   3. To reduce inflation
   4. To increase the budget deficit
4. Which of the following automatically increases during an economic recession?
   1. Income taxes
   2. Sales taxes
   3. Unemployment benefits
   4. Government spending on infrastructure
5. A budget deficit occurs when:
   1. Government spending equals tax revenue
   2. Government spending exceeds tax revenue
   3. Tax revenue exceeds government spending
   4. The economy is in a recession
6. What is the effect of a tax cut on aggregate demand?
   1. It always decreases aggregate demand
   2. It always increases aggregate demand
   3. It has no effect on aggregate demand
   4. It may increase or decrease aggregate demand depending on other factors
7. The marginal propensity to consume (MPC) is:
   1. The change in consumption divided by the change in disposable income
   2. The change in disposable income divided by the change in consumption
   3. Government spending divided by tax revenue
   4. Tax revenue divided by government spending