AP Macroeconomics Quiz: Fiscal Policy Trade-offs & Short-Run Phillips Curve

📚 Quick Study Guide

• 💰 Fiscal Policy: Government's use of spending and taxation to influence the economy.
• 📈 Expansionary Fiscal Policy: Increases government spending and/or decreases taxes to increase aggregate demand.
• 📉 Contractionary Fiscal Policy: Decreases government spending and/or increases taxes to decrease aggregate demand.
• 📊 Short-Run Phillips Curve (SRPC): Shows the inverse relationship between inflation and unemployment in the short run.
• ⬆️ SRPC Shifts: Changes in inflationary expectations shift the SRPC. Higher expectations shift it up; lower expectations shift it down.
• ⏳ Time Lags: Recognition lag, administrative lag, and operational lag can hinder fiscal policy effectiveness.
• 🤯 Crowding Out: Increased government borrowing can lead to higher interest rates, reducing private investment.
• 📐 Multiplier Effect: Change in spending leads to a larger change in GDP. Fiscal Multiplier = $\frac{1}{1-MPC}$ where MPC is the marginal propensity to consume.

Practice Quiz

1. Which of the following is an example of expansionary fiscal policy?
   1. Increasing taxes
   2. Decreasing government spending
   3. Increasing government spending
   4. Selling government bonds
2. If the government increases spending by $100 billion and the MPC is 0.8, what is the maximum possible change in GDP?
   1. $100 billion
   2. $400 billion
   3. $500 billion
   4. $80 billion
3. What does the short-run Phillips curve illustrate?
   1. The relationship between government spending and taxation
   2. The trade-off between inflation and unemployment
   3. The effect of interest rates on investment
   4. The impact of fiscal policy on economic growth
4. An increase in inflationary expectations will cause the short-run Phillips curve to:
   1. Shift to the left
   2. Shift to the right
   3. Remain unchanged
   4. Become vertical
5. Which of the following is a potential drawback of expansionary fiscal policy?
   1. Decreased aggregate demand
   2. Increased unemployment
   3. Crowding out of private investment
   4. Decreased inflation
6. A decrease in taxes is likely to cause:
   1. A leftward shift in the aggregate supply curve
   2. A rightward shift in the aggregate demand curve
   3. A decrease in government revenue
   4. An increase in unemployment
7. What is the effect of contractionary fiscal policy on aggregate demand and inflation?
   1. Increases aggregate demand and inflation
   2. Decreases aggregate demand and inflation
   3. Increases aggregate demand and decreases inflation
   4. Decreases aggregate demand and increases inflation