Hypothetical economy: C=$600 billion, I=$300 billion, G=$150 bill Assume for the long run: 1. For every 1% increase (decrease) in interest rate, planned investment decreases (increases) by $5 billion. 2. For every $10 billion increase (decrease) in government spending, interest rate increases (decreases) by 1%. 3. The MPC = 0.8 When government spending increases by $30 billion, the crowding-out effect can be represented by a
A) $30 billion decrease in investment.
B) $15 billion decrease in investment.
C) 3% decrease in the interest rate.
D) 1% increase in the interest rate.
Answer: B) $15 billion decrease in investment.
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If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________
A) rises; increases B) falls; increases C) rises; decreases D) falls; decreases E) rises; does not change
From the 1960s to 2014, transfer payments
A) have declined by half as a percentage of total federal government expenditures. B) have risen from 25 percent to about 48 percent of federal government expenditures. C) remained the same percentage of total federal government expenditures. D) have grown very slowly as a percentage of total federal government expenditures.