Author Question: Suppose the Fed pursues a policy that leads to higher interest rates in the United States. How will ... (Read 90 times)

mwit1967 · **on:** Jun 29, 2018

Suppose the Fed pursues a policy that leads to higher interest rates in the United States. How will this policy affect real GDP in the short run if the United States is an open economy? This policy

A) reduces investment spending and consumption spending, both of which reduce GDP. Net exports fall which increases GDP.
B) increases investment spending, consumption spending, and net exports, all of which increase GDP.
C) reduces investment spending and consumption spending, both of which reduce GDP. Net exports rise which increases GDP.
D) reduces investment spending, consumption spending and net exports, all of which reduce GDP.

Question 2

If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2, does it follow that the federal government acted to raise taxes or cut government spending in Year 2?

What will be an ideal response?

komodo7 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

D

Answer to Question 2

No, the economy could have been in an expansion in Year 2 with GDP growing faster than anticipated. The faster growth in GDP would raise tax revenues and decrease government spending on transfer payments, decreasing the budget deficit (in this case, moving it to a budget surplus).