AP Macroeconomics Flashcards: Fiscal Policy
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 21 cards to help you master important concepts.
Why is the government spending multiplier greater than the tax multiplier?
The government spending multiplier is greater because government spending affects aggregate demand directly, while tax changes affect it indirectly.
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Why is the government spending multiplier greater than the tax multiplier?
The government spending multiplier is greater because government spending affects aggregate demand directly, while tax changes affect it indirectly.
What are the two primary tools of fiscal policy?
The tools of fiscal policy are government spending and taxes/transfers.
What is the primary macroeconomic goal governments try to achieve using fiscal policies?
Governments implement fiscal policies to achieve macroeconomic goals, such as full employment.
Using the AD-AS model, what is the short-run effect of an increase in government spending?
An increase in government spending shifts the aggregate demand curve to the right, leading to higher real output and a higher price level in the short run.
Explain the difference between the direct and indirect effects of fiscal policy tools.
Government spending is a direct component of aggregate demand, so changes have a direct effect. Taxes and transfers change disposable income, which then influences consumption, making their effect indirect.
If the economy is experiencing an inflationary gap, what type of fiscal policy should the government implement?
The government should implement contractionary fiscal policy to address a positive output gap.
If the economy is in a recessionary gap, what type of fiscal policy should the government implement?
The government should implement expansionary fiscal policy to restore full employment.
What is fiscal policy?
Fiscal policy refers to the use of government spending and taxes/transfers to achieve macroeconomic goals, such as full employment.
To combat a recession, would the government increase or decrease taxes/transfers?
To combat a recession, the government would decrease taxes or increase transfers to indirectly boost aggregate demand.
What are lags to discretionary fiscal policy?
Lags are delays that occur in discretionary fiscal policy due to the time it takes to decide on and implement a policy action.
Using the AD-AS model, what is the short-run effect of an increase in taxes?
An increase in taxes shifts the aggregate demand curve to the left, leading to lower real output and a lower price level in the short run.
What causes the lags in discretionary fiscal policy to occur in reality?
In reality, lags exist because of factors such as the time it takes to decide on and implement a policy action.
What is meant by calculating the short-run effects of a fiscal policy action?
This involves using multipliers, such as the government spending or tax multiplier, to determine the total change in aggregate demand resulting from an initial policy change.
To combat inflation, would the government increase or decrease its spending?
To combat inflation, the government would decrease its spending to directly reduce aggregate demand.
What are the three main economic variables that fiscal policy can influence?
Fiscal policy can influence aggregate demand, real output, and the price level.
How does a change in government spending affect aggregate demand?
Changes in government spending affect aggregate demand directly.
What is contractionary fiscal policy?
Contractionary fiscal policy is used to restore full employment when the economy is in a positive (inflationary) output gap.
How do changes in taxes or transfers affect aggregate demand?
Changes in taxes or transfers affect aggregate demand indirectly.
What is expansionary fiscal policy?
Expansionary fiscal policy is used to restore full employment when the economy is in a negative (recessionary) output gap.
What is an output gap?
An output gap is the difference between the actual output of an economy and its potential output at full employment; it can be negative (recessionary) or positive (inflationary).
Which economic model is used to demonstrate the short-run effects of fiscal policy?
The AD-AS (Aggregate Demand-Aggregate Supply) model is used to demonstrate the short-run effects of fiscal policy.