Assume that the government increases spending and finances the expenditures by borrowing in the domestic capital markets. If the nation has highly mobile international capital markets and a flexible exchange rate system, what happens to the real risk-free interest rate and GDP Price Index in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises, and GDP Price Index rises.
b. There is not enough information to determine what happens to these two macroeconomic variables.
c. The real risk-free interest rate and GDP Price Index remain the same.
d. The real risk-free interest rate falls, and GDP Price Index falls.
e. The real risk-free interest rate rises, and GDP Price Index falls.
.A
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The Taylor rule implies that the Fed should set the federal funds target based on which of the following?
A) the proportionate gap between actual real GDP and a measure of potential real GDP B) the current deviation of the actual inflation rate from the Fed's inflation objective C) an estimated long-run real interest rate D) all of the above
The Ricardo-Barro effect holds that
A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP. B) government budget deficits have no effect on the real interest rate. C) a government budget deficit crowds out private investment. D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect.
Refer to Scenario 5.4. What is the pay-off of outcome C?
A) -150 B) 0 C) 25 D) 100 E) 150