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

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

Q: If the government decreases taxes by $$65$$ billion and the taxation multiplier is $$1.0$$, what is the percentage change in GDP if the base GDP is $$14$$ trillion?

$$\% \Delta GDP = \frac{65 \text{ billion}}{14 \text{ trillion}} \times 100 = 0.5\%$$

Q: If the output gap is calculated as $$\text{Output gap} = \frac{GDP - \text{Trend GDP}}{\text{Trend GDP}} \times 100$$, what is the output gap if GDP is $$18$$ trillion and trend GDP is $$20$$ trillion?

$$\frac{18 - 20}{20} \times 100 = -10\%$$

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 of the following is the most likely sequence of events?

Accepted Answer

Fed lowers short-term interest rates, long-term 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 government increases its expenditure by $$120$$ billion and the government expenditure multiplier is $$1.5$$, what is the resulting change in GDP?

Accepted Answer

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

Question 5

Which of the following best explains the concept of 'crowding out' in fiscal policy?

Accepted Answer

Government spending partially or fully displaces private expenditures by raising interest rates

Question 6

During a liquidity trap, monetary policy becomes less effective because:

Accepted Answer

Nominal interest rates cannot fall below zero, and expected real interest rates may remain positive due to deflation

Question 7

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

Accepted Answer

Unemployment insurance payments that increase during recessions

Question 8

If the government decreases taxes by $$65$$ billion and the taxation multiplier is $$1.0$$, what is the percentage change in GDP if the base GDP is $$14$$ trillion?

Accepted Answer

$$\% \Delta GDP = \frac{65 	ext{ billion}}{14 	ext{ trillion}} 	imes 100 = 0.5\%$$

Question 9

Which of the following policies would be considered a mix of fiscal and monetary policy?

Accepted Answer

Troubled Asset Relief Program (TARP) lending facilities

Question 10

What is the government expenditure multiplier under the crowding out scenario?

Accepted Answer

$$m = \frac{0}{1} = 0$$

Question 11

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

Accepted Answer

John Maynard Keynes

Question 12

If the output gap is calculated as $$	ext{Output gap} = \frac{GDP - 	ext{Trend GDP}}{	ext{Trend GDP}} 	imes 100$$, what is the output gap if GDP is $$18$$ trillion and trend GDP is $$20$$ trillion?

Accepted Answer

$$\frac{18 - 20}{20} 	imes 100 = -10\%$$

Question 13

Which of the following is a discretionary countercyclical fiscal policy?

Accepted Answer

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

Question 14

What is the main risk of using expansionary monetary policy during a recession?

Accepted Answer

Runaway inflation if the policy is too aggressive

Question 15

Which of the following best describes the effect of quantitative easing?

Accepted Answer

Fed buys long-term bonds, increasing bank reserves and lowering long-term interest rates

Question 16

If the government taxation multiplier is $$1.0$$ and taxes decrease by $$1$$, what is the change in GDP?

Accepted Answer

$$\Delta GDP = 1.0 	imes 1 = 1$$

Question 17

Which of the following is NOT a reason policymakers might use contractionary policy?

Accepted Answer

To increase employment and GDP growth

Question 18

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

Accepted Answer

Policy waste and policy lags

Question 19

Which of the following best describes the government taxation multiplier?

Accepted Answer

The change in GDP resulting from a $1 decrease in government taxation

Countercyclical Macroeconomic Policy: Study Guide

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