Fiscal Policy Quiz

AP Macroeconomics

Higher unemployment affect on AD

AD needs to shift right to correct the recessionary gap

Higher unemployment correction methods

Decreases taxes, increase government spending

Higher unemployment affect on federal budget

Towards deficit

Higher unemployment affect on national debt

Increase in debt

Budget deficit definition

Spending in excess of tax revenue, remainder goes towards debt

Contractionary fiscal policy

Shifts AD to the left, i.e. cutting government spending or increasing taxes, usually caused by demand-pull inflation

Budget surplus definition

Tax revenue in excess of spending, remainder goes towards combatting debt

Expansionary fiscal policy

Shifts AD to the right, i.e. increasing government spending or decreasing taxes

Recognition lag

Political figures take time to recognize that a problem is indeed a problem that requires a solution

Administrative lag

Congress takes time to pass policies

Operational lag

The policy itself takes time to be properly enacted

Automatic/built-in stabilizers

Already-enacted policies that correct recessionary/inflationary gaps without the need for new policies

Discretionary fiscal policy

Any fiscal policy that alters spending or taxes

Crowding out affect

Increased government spending decreases private sector spending