Question 1

What are expansionary policies?

Accepted Answer

Expansionary policies refer to a set of fiscal and monetary policies that increase aggregate demand, leading to the growth of the economy

(fiscal: increase govt. spending, decrease taxes; monetary: decrease RR, decrease DR, buy bonds)

Question 2

What are contractionary policies?

Accepted Answer

Contractionary policies are a set of fiscal and monetary policies that decrease aggregate demand, leading to a decrease in the growth of the economy

(fiscal: decrease govt. spending, increase taxes; monetary: increase RR, increase DR, sell bonds)

Question 3

What is an output gap?

Accepted Answer

The difference between the current level of real output and potential output

(inflationary/positive, recessionary/negative, or full employment)

Question 4

What will happen in a recession if no policy action is taken?

Accepted Answer

Aggregate supply will increase as a result of low wages and low costs

This will restore full employment

Question 5

What fiscal policies can be used in a recessionary gap?

Accepted Answer

Increase government spending or decrease taxes

Question 6

What monetary policies can be used in a recessionary gap?

Accepted Answer

Decrease the RR

Decrease the DR

Buy bonds

5.1 Fiscal and Monetary Policy Actions in the Short-Run, AP Macroeconomics Flashcards