AP Macroeconomics Question 330: Answer and Explanation
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1. When government uses expansionary fiscal policy, the spending multiplier is often smaller than predicted because of
- A. lower taxes.
- B. increasing net exports.
- C. falling unemployment.
- D. lower interest rates.
- E. rising price levels.
Correct Answer: E
E-The full multiplier is only felt if short-run aggregate supply is horizontal. Any increase in the price level decreases the impact of the spending multiplier.