**Monetary Policy and Economic Indicators**When assessing economic performance, one crucial concept to understand is the output gap. This measures the difference between the actual level of economic output and the potential output level when the economy is operating at full capacity. **Understanding the Federal Reserve’s Response to a Positive Output Gap:**If the output gap is positive, this means that the actual economic output is greater than the potential output. Typically, this situation signals an overheating economy, which could lead to inflation. In response, the Federal Reserve might take the following actions:Question: If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influencing short- and long-term interest rates _____, and _____ total spending in the economy.Options:- lower; downward; increase- raise; upward; decrease- raise; upward; increase- lower; downward; decrease**Explanation:**- **Raising the Federal Funds Rate:** When the Federal Reserve raises the federal funds rate, it increases the cost of borrowing. - **Influencing Interest Rates:** Raising the rate influences both short- and long-term interest rates upward.- **Impact on Spending:** Higher interest rates tend to decrease overall spending in the economy as loans become more expensive and savings become more attractive.**Correct Answer:**- **Raise; upward; decrease**By doing so, the Federal Reserve aims to cool down the economy, control inflation, and bring the output closer to its potential level. ### Understanding Tax Benefits and Income Levels---#### Question:Suppose a high-income person, a middle-income person, and a low-income person purchase identical houses that are financed by similar mortgages. Who gets the largest tax benefit?1. ○ They all pay the same tax rate.2. ○ The high-income person3. ○ The middle-income person4. ○ The low-income person---#### Explanation:When analyzing who receives the largest tax benefit, it's important to understand how mortgage interest deductions work in the tax system. Here’s a breakdown:1. **They all pay the same tax rate:** - This option is usually not applicable as tax rates vary by income levels in most progressive tax systems.2. **The high-income person:** - Higher-income individuals generally receive more substantial tax benefits from mortgage interest deductions because they are in higher tax brackets. The value of the deduction is more significant for them.3. **The middle-income person:** - Middle-income individuals also benefit from mortgage interest deductions but usually not as much as higher-income individuals due to being in lower tax brackets.4. **The low-income person:** - Low-income individuals may see minimal benefits from mortgage interest deductions, especially if their taxable income is low enough that they fall into the lowest tax brackets or utilize the standard deduction instead.Understanding the nuances of tax benefits and deductions can be complex and involves knowing the detailed workings of the tax system, individual income situations, and specific tax laws applicable in a given year.

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

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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