AP Macroeconomics chapter practice15 questions

16 Fiscal Policy, Deficits, and Public Debt

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Fiscal and monetary tools are controlled by different authorities. Which of the following is expansionary fiscal policy?

Government purchases enter aggregate demand directly, so raising them adds to spending without waiting on anyone's decision to spend. Choices A and B move the same fiscal levers in the contractionary direction. Choices C and D are central-bank operations, which work on demand only through interest rates.
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E. A rise in government purchases

Government purchases enter aggregate demand directly, so raising them adds to spending without waiting on anyone's decision to spend. Choices A and B move the same fiscal levers in the contractionary direction. Choices C and D are central-bank operations, which work on demand only through interest rates.

Question 2

Question 2 of 15

A recession reduces household incomes while existing tax law remains unchanged. Which response cushions disposable income automatically?

Existing rate schedules simply collect less when incomes fall, and no vote is needed, which is what makes the response automatic. Choices B and D both wait on legislation, one on the spending side and one on the tax side. Choice C is a central-bank operation, and E is a price-level effect on wealth rather than a budget rule.
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A. Lower tax collections under current rates

Existing rate schedules simply collect less when incomes fall, and no vote is needed, which is what makes the response automatic. Choices B and D both wait on legislation, one on the spending side and one on the tax side. Choice C is a central-bank operation, and E is a price-level effect on wealth rather than a budget rule.

Question 3

Question 3 of 15

Budget documents report both an annual deficit and an outstanding debt. What is the deficit for a fiscal year?

A deficit accumulates over a budget year, so it is measured in dollars per year, like income rather than like wealth. Choice B assigns it a single date, which is how a stock is measured. Choice C confuses it with the running total, D leaves transfers and interest out of the definition, and E measures a ten-year change in the stock.
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A. A flow measured over a budget period

A deficit accumulates over a budget year, so it is measured in dollars per year, like income rather than like wealth. Choice B assigns it a single date, which is how a stock is measured. Choice C confuses it with the running total, D leaves transfers and interest out of the definition, and E measures a ten-year change in the stock.

Question 4

Question 4 of 15

Public debt and the annual budget deficit are frequently confused. What is the public debt of a national government?

Debt is everything still owed from past borrowing, net of what has been repaid. Choice A names one year's deficit and B one year's interest, both flows. Choice D lists assets rather than obligations, and E is an external balance with no connection to the budget.
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C. The accumulated total of past borrowing

Debt is everything still owed from past borrowing, net of what has been repaid. Choice A names one year's deficit and B one year's interest, both flows. Choice D lists assets rather than obligations, and E is an external balance with no connection to the budget.

Question 5

Question 5 of 15

The budget balance has a cyclical part and a structural part. What does the structural balance measure?

Stripping out the part of the balance that comes from the business cycle leaves what the budget would look like at full employment, which is the part policy actually chose. Choice A is the actual balance, cyclical and structural mixed together. Choice B names a single spending line, C confuses how a deficit is financed with how large it is, and E is a debt ratio, a stock measured against income.
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D. The balance that would hold at full employment

Stripping out the part of the balance that comes from the business cycle leaves what the budget would look like at full employment, which is the part policy actually chose. Choice A is the actual balance, cyclical and structural mixed together. Choice B names a single spending line, C confuses how a deficit is financed with how large it is, and E is a debt ratio, a stock measured against income.

Question 6

Question 6 of 15

An increase in government purchases shifts aggregate demand to the right. In the short run, what happens to real output and the price level?

Along an upward-sloping short-run supply curve, more demand pulls output and prices up together. Choice A reverses the shift. Choice C has prices falling as demand rises, D applies the vertical long-run result to the short run, and E denies that a demand shift does anything.
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B. Both of them rise.

Along an upward-sloping short-run supply curve, more demand pulls output and prices up together. Choice A reverses the shift. Choice C has prices falling as demand rises, D applies the vertical long-run result to the short run, and E denies that a demand shift does anything.

Question 7

Question 7 of 15

Households spend 80 cents of each additional dollar of disposable income. In the simple fixed-price model, a one-dollar tax increase changes equilibrium output by

Only the consumed part of the dollar leaves the spending stream, so (-0.8)/(1-0.8)=-4. Choice A applies the spending multiplier of 5 to the full dollar. Choice C divides by the MPC instead, D stops after the first round of lost consumption, and E reports the marginal propensity to save.
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B. -4

Only the consumed part of the dollar leaves the spending stream, so (-0.8)/(1-0.8)=-4. Choice A applies the spending multiplier of 5 to the full dollar. Choice C divides by the MPC instead, D stops after the first round of lost consumption, and E reports the marginal propensity to save.

Question 8

Question 8 of 15

A tax cut of 25 is enacted in a model whose tax multiplier is -3. Equilibrium output

A cut is a negative change in taxes, so -3 (-25)=+75. Choice A keeps the multiplier's sign and ignores that taxes fell. Choices B and C drop the multiplier entirely, B keeping the wrong sign as well, and D uses a multiplier of 2.
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E. rises by 75

A cut is a negative change in taxes, so -3 (-25)=+75. Choice A keeps the multiplier's sign and ignores that taxes fell. Choices B and C drop the multiplier entirely, B keeping the wrong sign as well, and D uses a multiplier of 2.

Question 9

Question 9 of 15

In the simplest fixed-price model with lump-sum taxes, government purchases and taxes rise by the same amount. Equilibrium output changes

The purchase adds its full amount to demand, while the tax takes back only the consumed fraction, and the leftover, multiplied through, comes to exactly the original amount. Choice A assumes the two cancel. Choices D and E apply one side's multiplier to the whole pair, and B assumes the tax rise cancels half the spending rise.
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C. by the full amount

The purchase adds its full amount to demand, while the tax takes back only the consumed fraction, and the leftover, multiplied through, comes to exactly the original amount. Choice A assumes the two cancel. Choices D and E apply one side's multiplier to the whole pair, and B assumes the tax rise cancels half the spending rise.

Question 10

Question 10 of 15

Automatic stabilizers operate through existing law rather than new legislation. Which of the following describes their behavior during an expansion?

Rising incomes push earnings into higher brackets while fewer households qualify for income-tested benefits, so the budget tightens on its own. Choices A and B reverse each movement in turn. Choice D reverses the cyclical swing of the deficit, and E describes the discretionary route these stabilizers are designed to avoid.
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C. Tax revenue rises and transfers decline.

Rising incomes push earnings into higher brackets while fewer households qualify for income-tested benefits, so the budget tightens on its own. Choices A and B reverse each movement in turn. Choice D reverses the cyclical swing of the deficit, and E describes the discretionary route these stabilizers are designed to avoid.

Question 11

Question 11 of 15

Which of the following actions affects aggregate demand most directly, dollar for dollar, in the simple model?

A dollar of government purchases is itself a dollar of aggregate demand, so the first round is the full amount. Choice B moves demand only through the fraction households decide to spend, which is why the tax multiplier is smaller. Choices A, C, and E work through financial conditions and reach spending later, if at all.
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D. A change in government purchases

A dollar of government purchases is itself a dollar of aggregate demand, so the first round is the full amount. Choice B moves demand only through the fraction households decide to spend, which is why the tax multiplier is smaller. Choices A, C, and E work through financial conditions and reach spending later, if at all.

Question 12

Question 12 of 15

A budget deficit widens although no new spending or tax law has been enacted. Which of the following explains that change?

Receipts and transfer outlays move with the cycle under rules already on the books, so the balance can shift with no new law. Choice A confuses a central-bank portfolio trade with federal spending. Choice C would narrow the deficit rather than widen it, D states a true distinction that explains nothing, and E names the trade balance instead of the budget.
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B. A recession cut receipts and raised transfers.

Receipts and transfer outlays move with the cycle under rules already on the books, so the balance can shift with no new law. Choice A confuses a central-bank portfolio trade with federal spending. Choice C would narrow the deficit rather than widen it, D states a true distinction that explains nothing, and E names the trade balance instead of the budget.

Question 13

Question 13 of 15

Heavy crowding out accompanies a debt-financed increase in government purchases. What happens to the fiscal multiplier?

Higher interest rates cancel part of the original demand increase, so output rises by less than the simple formula predicts. Choice B reverses that and C overstates it, since a positive multiplier merely shrinks. Choices D and E deny that the interest-rate channel operates at all.
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A. It becomes smaller.

Higher interest rates cancel part of the original demand increase, so output rises by less than the simple formula predicts. Choice B reverses that and C overstates it, since a positive multiplier merely shrinks. Choices D and E deny that the interest-rate channel operates at all.

Question 14

Question 14 of 15

A legislature raises personal income taxes while the central bank leaves policy unchanged. In the short run, aggregate demand

Higher taxes cut disposable income, households spend less, and demand falls back. Choice A reverses the direction and B denies that taxes reach spending. Choice C changes the curve's shape instead of its position, and E forgets that only the consumed fraction of the tax leaves the spending stream.
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D. shifts to the left

Higher taxes cut disposable income, households spend less, and demand falls back. Choice A reverses the direction and B denies that taxes reach spending. Choice C changes the curve's shape instead of its position, and E forgets that only the consumed fraction of the tax leaves the spending stream.

Question 15

Question 15 of 15

Persistent government borrowing may reduce future potential output. Which of the following consequences produces that result?

Displacing private investment leaves a smaller capital stock for the next generation of workers, and less capital means less output. Choices A and B reverse the investment and interest-rate effects of sustained borrowing. Choice C misstates what borrowing does to future obligations, and D assigns the damage to the labor market instead of the capital stock.
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E. It crowds out private capital investment.

Displacing private investment leaves a smaller capital stock for the next generation of workers, and less capital means less output. Choices A and B reverse the investment and interest-rate effects of sustained borrowing. Choice C misstates what borrowing does to future obligations, and D assigns the damage to the labor market instead of the capital stock.

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