AP Macroeconomics Question 34: Answer and Explanation

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Question: 34

8. Expansionary fiscal policy would best be prescribed to

  • A. eliminate a recessionary gap
  • B. reduce inflation
  • C. reduce the interest rate
  • D. eliminate an inflationary gap
  • E. avoid crowding out

Correct Answer: A


A Expansionary fiscal policy will increase aggregate demand and aggregate expenditure. It is thus likely to increase the price level and the interest rate, and cause crowding out. It will cause an inflationary gap to get bigger, but will help to eliminate a recessionary gap.