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Fiscal and Monetary Policy Actions in the Short Run

AP Macro - 5.1

Fiscal policy uses government spending and taxes to shift aggregate demand. Monetary policy uses interest rates and money supply to influence aggregate demand. When used together, their effects on output and interest rates depend on whether they reinforce or offset each other.

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Practice Questions: Test Your Understanding

Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.

Question 1 of 3

Suppose an economy is in a recession. Policymakers implement expansionary fiscal policy while the central bank simultaneously implements contractionary monetary policy. What is the most likely combined effect on real output and real interest rates in the short run?

Real output increases, Real interest rates decrease
Real output decreases, Real interest rates increase
Real output effect is indeterminate, Real interest rates increase
Real output increases, Real interest rate effect is indeterminate
Real output decreases, Real interest rate effect is indeterminate

Key Takeaways

  • 📊
    Master the fundamentals: Understanding these core concepts is essential for success in AP Economics.
  • ✅
    Practice makes perfect: Use the interactive exercises and practice questions to reinforce your understanding.