Question 1

What is fiscal policy?

Accepted Answer

Actions by Congress to stabilize the economy

(government spending or taxation changes)

Question 2

What is discretionary vs. non-discretionary fiscal policy?

Accepted Answer

Discretionary fiscal policy: Congress creates a new bill that is designed to change AD through government spending or taxation (stimulus checks during Covid)

Non-discretionary fiscal policy: permanent spending or taxation laws already on the books that help regulate the economy (social security, welfare, and unemployment compensations)

Question 3

What is contractionary vs. expansionary fiscal policy?

Accepted Answer

Contractionary: Laws that reduce inflation, decrease GDP (Close an Inflationary Gap)

Expansionary: Laws that reduce unemployment and increase GDP (Close a Recessionary Gap)

Question 4

How much government spending is required to close a $20 B recessionary gap if the MPC=0.8?

Accepted Answer

MPC=0.8, so MPS=0.2 and spending multiplier = 5

$20 B / 5 = $4 B to close the gap

Question 5

How much in tax cuts is required to close a $20 B recessionary gap if the MPC=0.8?

Accepted Answer

MPC=0.8, so MPS=0.2 and tax multiplier = -MPC/MPS = -4

$20 B / -4 = -$5 B in tax is required to close to gap ($5 B cut)

3.8 Fiscal Policy, AP Macroeconomics Flashcards