AP Macroeconomics Flashcards: Fiscal and Monetary Policy Actions in the Short Run
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
What is a positive output gap?
A positive, or inflationary, output gap occurs when the economy is operating above its full employment level, often leading to rising price levels.
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What is a positive output gap?
A positive, or inflationary, output gap occurs when the economy is operating above its full employment level, often leading to rising price levels.
What is the primary goal of using a combination of fiscal and monetary policies when an economy is in an output gap?
The primary goal is to restore the economy to full employment by closing either a negative (recessionary) or positive (inflationary) output gap.
What are the four main economic variables influenced by a combination of fiscal and monetary policies?
A combination of fiscal and monetary policies can influence aggregate demand, real output, the price level, and interest rates.
Why might policymakers use a combination of fiscal and monetary policy actions simultaneously?
Policymakers may use combined actions to create a stronger, more coordinated effect on aggregate demand to more effectively restore the economy to full employment.
If an economy is in an inflationary gap, what combination of policy actions could be used to restore full employment?
A combination of contractionary fiscal policy (e.g., higher taxes, decreased government spending) and contractionary monetary policy (e.g., central bank selling bonds) would be used.
A government raises taxes while the central bank sells bonds. What is the intended short-run effect on aggregate demand and interest rates?
This combination of contractionary policies is intended to decrease aggregate demand and put upward pressure on interest rates to combat inflation.
A government increases spending while the central bank buys bonds. What is the intended short-run effect on real output and the price level?
This combination of expansionary policies is intended to increase aggregate demand, which in the short run leads to an increase in both real output and the price level.
What is a negative output gap?
A negative, or recessionary, output gap occurs when the economy is operating below its full employment level, indicating a period of economic downturn.
If an economy is in a recessionary gap, what combination of policy actions could be used to restore full employment?
A combination of expansionary fiscal policy (e.g., lower taxes, increased government spending) and expansionary monetary policy (e.g., central bank buying bonds) would be used.
Which component of the economy do combined fiscal and monetary policies directly target to influence output and the price level?
Combined fiscal and monetary policies directly target and influence aggregate demand to affect real output and the price level in the short run.