Suppose that Federal Reserve policy leads to higher interest ...

[piesebel]

Suppose that Federal Reserve policy 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 a closed economy, and how will it affect real GDP in the short run if the United States is an open economy?

Question 2

Suppose that Congress allocates 5 billion to an energy-efficient appliance rebate program. It also raises taxes by 5 billion to keep the deficit from growing. If the marginal propensity to consume is 0.8, what is the effect on equilibrium GD
 
  A) GDP does not change. B) GDP increases by 5 billion.
  C) GDP increases by 25 billion. D) GDP increases by 4 billion.

[Jmfn03]

Answer to Question 1

For a closed economy, higher interest rates decrease domestic investment spending and purchases of consumer durables in the short run so that real GDP decreases. For an open economy, higher interest rates decrease domestic investment spending and purchases of consumer durables, as they do in a closed economy. However, in an open economy, higher interest rates also raise the value of the dollar in the foreign exchange market. As a result, net exports will decrease and, therefore, the decrease in real GDP is larger for an open economy than for a closed economy.

Answer to Question 2

B