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AP Macroeconomics Practice Quiz: Fiscal and Monetary Policy Actions in the Short Run

Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026

Test your understanding with short quizzes. This quiz has 9 questions to check your progress.

Question 1 of 9

Suppose an economy is experiencing a recessionary output gap. Which of the following combinations of fiscal and monetary policies would be most effective at restoring full employment?

All Questions (9)

Suppose an economy is experiencing a recessionary output gap. Which of the following combinations of fiscal and monetary policies would be most effective at restoring full employment?

A) An increase in government spending and the central bank selling government bonds.

B) A decrease in taxes and the central bank buying government bonds.

C) A decrease in government spending and the central bank buying government bonds.

D) An increase in taxes and the central bank selling government bonds.

Correct Answer: B

To close a recessionary gap, the economy needs expansionary policies to increase aggregate demand. A decrease in taxes (expansionary fiscal policy) and the central bank buying bonds (expansionary monetary policy) both work to increase aggregate demand and move the economy toward full employment.

If an economy is in a positive (inflationary) output gap, which combination of policies would be appropriate to restore full employment?

A) Expansionary fiscal policy and expansionary monetary policy.

B) Contractionary fiscal policy and expansionary monetary policy.

C) Expansionary fiscal policy and contractionary monetary policy.

D) Contractionary fiscal policy and contractionary monetary policy.

Correct Answer: D

A positive or inflationary output gap requires policies that reduce aggregate demand. Both contractionary fiscal policy (e.g., decreased government spending, increased taxes) and contractionary monetary policy (e.g., selling bonds) decrease aggregate demand, which helps to lower the price level and bring output back to the full employment level.

A coordinated policy action of decreasing taxes and having the central bank buy government bonds will most likely have what short-run effects on the price level and real output?

A) Price level will decrease, and real output will decrease.

B) Price level will increase, and real output will increase.

C) Price level will decrease, and real output will increase.

D) Price level will increase, and real output will decrease.

Correct Answer: B

Decreasing taxes is an expansionary fiscal policy, and buying bonds is an expansionary monetary policy. Both policies increase aggregate demand. A rightward shift in the aggregate demand curve leads to a higher price level and higher real output in the short run.

Assume the government increases spending to combat a recession, and the central bank wants to keep interest rates from rising. Which of the following monetary policy actions would be most appropriate?

A) Implement an expansionary monetary policy.

B) Implement a contractionary monetary policy.

C) Keep the money supply constant.

D) Increase the required reserve ratio.

Correct Answer: A

Increased government spending (expansionary fiscal policy) increases the demand for loanable funds, which puts upward pressure on interest rates. To counteract this and keep interest rates stable or low, the central bank would need to implement an expansionary monetary policy, which increases the money supply and puts downward pressure on interest rates.

If the government enacts an expansionary fiscal policy by increasing its borrowing, while the central bank simultaneously enacts a contractionary monetary policy, what will be the combined effect on interest rates?

A) Interest rates will decrease.

B) Interest rates will remain unchanged.

C) The effect on interest rates will be indeterminate.

D) Interest rates will increase.

Correct Answer: D

Expansionary fiscal policy (increased borrowing) increases the demand for loanable funds, putting upward pressure on interest rates. Contractionary monetary policy (e.g., selling bonds) decreases the money supply, also putting upward pressure on interest rates. Since both policies push interest rates in the same direction, the combined effect is a definite increase in interest rates.

Suppose the government cuts taxes, while at the same time, the central bank sells a significant amount of government bonds. What is the likely combined effect on real output in the short run?

A) Real output will definitely increase.

B) Real output will definitely decrease.

C) The effect on real output is indeterminate.

D) Real output will not change.

Correct Answer: C

A tax cut is an expansionary fiscal policy that increases aggregate demand and real output. Selling bonds is a contractionary monetary policy that decreases aggregate demand and real output. Because these two policies have opposing effects on aggregate demand, the net effect on real output is indeterminate without knowing the relative magnitude of each policy action.

A combination of fiscal and monetary policies that are expansionary in nature are designed to influence which of the following in the short run?

A) An increase in aggregate demand.

B) A decrease in aggregate demand.

C) An increase in short-run aggregate supply.

D) A decrease in short-run aggregate supply.

Correct Answer: A

The content states that combined policies can influence aggregate demand. Expansionary policies, by definition, aim to increase spending and economic activity, which is represented by an increase (a rightward shift) in the aggregate demand curve.

To combat high inflation, policymakers decide to increase income taxes and have the central bank increase the discount rate. This combination of policies will lead to which of the following?

A) Higher real output and a higher price level.

B) Lower real output and a lower price level.

C) Higher interest rates and an indeterminate effect on real output.

D) Lower interest rates and higher real output.

Correct Answer: B

Increasing income taxes is a contractionary fiscal policy, and increasing the discount rate is a contractionary monetary policy. Both policies are designed to decrease aggregate demand. A decrease in aggregate demand leads to a lower real output and a lower price level in the short run.

If the government pursues an expansionary fiscal policy to increase real output, while the central bank simultaneously pursues an expansionary monetary policy, what is the combined effect on interest rates?

A) Interest rates will definitely increase.

B) Interest rates will definitely decrease.

C) The effect on interest rates is indeterminate.

D) Interest rates will remain constant.

Correct Answer: C

Expansionary fiscal policy, often financed by borrowing, increases the demand for loanable funds and puts upward pressure on interest rates. Expansionary monetary policy increases the supply of money, which puts downward pressure on interest rates. Since the two policies have opposing effects on interest rates, the net result is indeterminate.