AP Macroeconomics Question 441: Answer and Explanation

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Question: 441

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.