Q: According to the Taylor Rule, what is the formula for the federal funds rate?

$$\text{Federal funds rate} = \text{Long-run federal funds rate target} + 1.5(\text{Inflation rate} - \text{Inflation rate target}) + 0.5(\text{Output gap in \% points})$$

Q: What is the government expenditure multiplier if a $$1 increase in government spending leads to a 2 $$increase in GDP?

$$m = \frac{\text{Change in GDP}}{\text{Change in Government Expenditure}} = \frac{2}{1} = 2$$

Q: If the government expenditure multiplier is 1.5 and the government increases spending by $120 billion, what is the expected change in GDP?

$$\Delta GDP = 1.5 \times 120 \text{ billion} = 180 \text{ billion}$$

Q: What is the expected real interest rate if the nominal interest rate is 0% and the expected inflation rate is -1%?

$$\text{Expected real interest rate} = 0\% - (-1\%) = 1\%$$

Question 1

Which of the following best describes the primary goal of countercyclical macroeconomic policy?

Accepted Answer

To reduce the intensity of economic fluctuations and smooth the growth rates of employment, GDP, and prices.

Question 2

Suppose the Federal Reserve implements an expansionary monetary policy. Which sequence of events is most likely to occur?

Accepted Answer

Short-term interest rates fall, consumption and investment rise, labor demand shifts right.

Question 3

According to the Taylor Rule, what is the formula for the federal funds rate?

Accepted Answer

$$	ext{Federal funds rate} = 	ext{Long-run federal funds rate target} + 1.5(	ext{Inflation rate} - 	ext{Inflation rate target}) + 0.5(	ext{Output gap in \% points})$$

Question 4

If the current inflation rate is 1.5%, the inflation target is 2.0%, the output gap is -5%, and the long-run federal funds rate target is 3.5%, what is the federal funds rate according to the Taylor Rule?

Accepted Answer

$$3.5\% + 1.5(1.5\% - 2.0\%) + 0.5(-5\%) = 0.25\%$$

Question 5

Which of the following is a real-world example of a discretionary countercyclical fiscal policy?

Accepted Answer

The $787 billion American Recovery and Reinvestment Act of 2009.

Question 6

What is the government expenditure multiplier if a $$1 increase in government spending leads to a 2 $$increase in GDP?

Accepted Answer

$$m = \frac{	ext{Change in GDP}}{	ext{Change in Government Expenditure}} = \frac{2}{1} = 2$$

Question 7

Which scenario best illustrates the concept of 'crowding out' in fiscal policy?

Accepted Answer

Government increases spending, causing interest rates to rise and private investment to fall.

Question 8

If the government expenditure multiplier is 1.5 and the government increases spending by $120 billion, what is the expected change in GDP?

Accepted Answer

$$\Delta GDP = 1.5 	imes 120 	ext{ billion} = 180 	ext{ billion}$$

Question 9

Which of the following is NOT a tool used by the Federal Reserve to influence the federal funds rate?

Accepted Answer

Changing government tax rates

Question 10

What is the expected real interest rate if the nominal interest rate is 0% and the expected inflation rate is -1%?

Accepted Answer

$$	ext{Expected real interest rate} = 0\% - (-1\%) = 1\%$$

Question 11

Which of the following best describes quantitative easing?

Accepted Answer

The Fed buys long-term bonds to increase the supply of bank reserves and lower long-term interest rates.

Question 12

Which policy is most likely to be used to 'cool off' an overheating economy?

Accepted Answer

Contractionary monetary policy

Question 13

If a $65 billion tax cut is implemented and the government taxation multiplier is 1.0, what is the expected change in GDP?

Accepted Answer

$$\Delta GDP = 1.0 	imes 65 	ext{ billion} = 65 	ext{ billion}$$

Question 14

Which of the following is an example of an automatic countercyclical fiscal policy component?

Accepted Answer

Tax revenue falls automatically during a recession.

Question 15

Which economist is most associated with vigorous government intervention in markets?

Accepted Answer

John Maynard Keynes

Question 16

What is the national income accounting identity used in macroeconomics?

Accepted Answer

$$Y = C + I + G + X - M$$

Question 17

Which of the following policies blurs the line between fiscal and monetary policy?

Accepted Answer

Troubled Asset Relief Program (TARP)

Question 18

If the government expenditure multiplier is estimated to be between 0.6 and 1.2, what does this imply about the effectiveness of government spending in stimulating GDP?

Accepted Answer

A $$1 increase in government spending will increase GDP by between 0.60 $$and $1.20.

Question 19

Which of the following is a potential drawback of government programs designed to stimulate the economy?

Accepted Answer

Policy waste and policy lags.

Countercyclical Macroeconomic Policy: Concepts, Tools, and Applications

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