AP Macroeconomics Question 441: Answer and Explanation
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4. If the economy is suffering from extremely high rates of inflation, which of the following fiscal policies would be an appropriate strategy for the economy?
- A. Increase government spending and decrease taxes.
- B. Decrease government spending and increase taxes.
- C. Increase government spending with no change in taxes.
- D. The Federal Reserve increases the discount rate.
- E. Decrease taxes with no change in government spending.
Correct Answer: B
B-High inflation rates require a decrease in AD, and this is the only contractionary fiscal policy. Fed policy is not fiscal; it is monetary.