How to find fiscal policy
AP Macroeconomics · Learn by Concept
Help Questions
AP Macroeconomics › How to find fiscal policy
Which of the following is not a tool used by the Federal Reserve?
Increasing aggregate demand through fiscal policy
Buying and selling bonds via open market operations
Adjusting the discount rate
Adjusting the reserve requirements for banks
All of these tools are used by the Federal Reserve
Explanation
Fiscal policy is the use of government spending to influence the economy. As such, fiscal policy is outside of the scope of the Federal Reserve's powers - fiscal policy can only be initiated by Congress.
Which of the following is the most effective fiscal policy if potential GDP exceeds current GDP?
Government spending increases.
The Federal Reserve sells US Treasury bonds.
The tax rate increases.
The Federal Reserve buys US Treasury bonds.
Explanation
If potential GDP exceeds current GDP, the country is in a recessionary gap. The fiscal policies that are effective in closing a recessionary gap are to increase government spending or to decrease (not increase) taxes.
Note that Federal Reserve operations are monetary, not fiscal, policies.