AP Macroeconomics Question 330: Answer and Explanation

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Question: 330

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.