Question

Mandatory spending is spending that:

A) includes all federal government spending.

B) supports programs that do not get determined annually but instead are set in law.

C) includes all state and local government spending.

D) is appropriated by Congress annually.

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 1%, then the Fed will want the new real interest rate to be:

A) lower than the neutral interest rate.

B) higher than the neutral interest rate.

C) equal to the neutral interest rate.

D) equal to the inflation rate.

If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.

A) raise; upward; increase

B) lower; downward; increase

C) lower; downward; decrease

D) raise; upward; decrease

Answer 1

1)There is certain amount of Spending which has to be incurred in order to support programs dead do not instead of set in law. This spending is known as mandatory spending. Mandatory spending is not appropriated by Congress annually.

Hence, mandatory spending is spending that supports programs that do not get determined annually but instead are set in law.

Therefore, option B is correct.

2) if the actual Inflation is lower than the target inflation then the Federal Reserve would decrease the the interest rate below the neutral interest rate in order to achieve the target inflation.

So, Fed will want the new real interest rate to be lower than the neutral interest rate.

Hence, option A is correct.

3) if the output gap is positive it means that the real GDP is above the potential GDP. To correct this gap Federal Reserve will use its floor framework to raise the federal funds rate, influence short and long term interest rates upward and decrease total spending in the economy.

Hence, option D is correct.