Exam 13: Countercyclical Macroeconomic Policy

Which of the following is true of the bank reserves held at the Fed?

Plutonia uses the Taylor rule to set the short-term interest rate at which banks lend to one another.Compute the short-term interest rate that should be set in Plutonia if the inflation target is 2 percent,the long-term target for the interest rate is 3 percent,the current rate of inflation is 5 percent,and output is 5 percent below its trend.

Expansionary fiscal policy uses ________ government spending and ________ taxes to increase aggregate economic activity.

A fall in long-term interest rates leads to a ________.

A countercyclical monetary policy is conducted by ________ with the overall goal of ________.

If people expect the Fed to adopt a(n)________ for several years,the long-term expected real interest rate will remain ________.

Which of the following is likely to happen during a boom?

If the quantity of bank reserves held at the Fed increases,________.

If the federal funds rate is set by the Taylor rule and the inflation rate increases by 3 percentage points,everything else remaining unchanged,the federal funds rate for a given inflation target should ________.

Expansionary fiscal policy leads to a ________.

Give two disadvantages of using an expenditure-based fiscal policy over a taxation-based fiscal policy.

What does crowding out lead to? i.A smaller effect of a countercyclical fiscal policy ii.Higher investment expenditures

Scenario: The following figure shows the federal funds market. Assume that the market of reserves is in equilibrium at point (R₀, i₀). -Refer to the scenario above.If the Fed uses a contractionary monetary policy,the new equilibrium quantity of reserves is ________ and the new federal funds rate is ________.

Contractionary effects on the rate of GDP growth are always a by-product of other countercyclical policies.

A specific policy rule announcement by the Fed increases the public's ability to forecast future interest rates.

What is the Fed's "dot plot" and why is it useful?

Which of the following is likely to happen because of a contractionary monetary policy?

A decrease in government expenditures leads to a(n)________ in the growth rate of real GDP and a ________ shift of the labor demand curve.

If the nominal interest rate is 0 percent and the real interest rate is 2 percent,what is the inflation rate?

The economy of Budopia is going through a recession.How will a countercyclical policy affect the labor market in Budopia if wages are downwardly rigid? Explain with a diagram.