A Federal Reserve publication made the following observation: Some studies directly estimate the so-called fiscal multiplier-the...

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A Federal Reserve publication made the following observation: "Some studies directly estimate the so-called fiscal multiplier-the response of GDP to a policy change affecting government spending or tax revenue and test whether this multiplier depends on the state of the economy." Source: Tim Mahedy and Daniel J. Wilson, "Fiscal Policy in Good Times and Bad," Federal Reserve Bank of San Francisco Economic Letter, July 9, 2018. a. What do the authors mean by "the state of the economy"? Why might the state of the economy matter for the size of the multiplier? A. The size of the multiplier might be affected by the "state of the economy"-whether the economy is market-based or centrally planned-in that real GDP might change more in response to fiscal policy changes (and prices less) when real GDP is initially below potential GDP, but real GDP might change less (and prices more) when real GDP is initially above potential GDP. B. The size of the multiplier might be affected by the "state of the economy" whether real GDP is above or below potential GDP in that real GDP might change less in response to fiscal policy changes (and prices more) when real GDP is initially below potential GDP, but real GDP might change more (and prices less) when real GDP is initially above potential GDP. C. The size of the multiplier would not be affected by the "state of the economy"-whether real GDP is above or below potential GDP-because all studies indicate that real GDP (and prices) change by the same amounts in response to fiscal policy changes regardless of whether real GDP is above or below potential GDP. D. The size of the multiplier might be affected by the "state of the economy"-whether real GDP is above or below potential GDP-in that real GDP might change more in response to fiscal policy changes (and prices less) when real GDP is initially below potential GDP, but real GDP might change less (and prices more) when real GDP is initially above potential GDP. b. The authors note that it is difficult for economists to conduct these studies because of a "historical rarity." What might be a historically rare event in this context? A. Slower than normal economic growth in an environment of historically low interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are higher. B. Higher than normal economic growth in an environment of historically low interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are higher. C. Slower than normal economic growth in an environment of historically high interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are lower. D. Higher than normal economic growth in an environment of historically high interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are lower. A Federal Reserve publication made the following observation: "Some studies directly estimate the so-called fiscal multiplier-the response of GDP to a policy change affecting government spending or tax revenue and test whether this multiplier depends on the state of the economy." Source: Tim Mahedy and Daniel J. Wilson, "Fiscal Policy in Good Times and Bad," Federal Reserve Bank of San Francisco Economic Letter, July 9, 2018. a. What do the authors mean by "the state of the economy"? Why might the state of the economy matter for the size of the multiplier? A. The size of the multiplier might be affected by the "state of the economy"-whether the economy is market-based or centrally planned-in that real GDP might change more in response to fiscal policy changes (and prices less) when real GDP is initially below potential GDP, but real GDP might change less (and prices more) when real GDP is initially above potential GDP. B. The size of the multiplier might be affected by the "state of the economy" whether real GDP is above or below potential GDP in that real GDP might change less in response to fiscal policy changes (and prices more) when real GDP is initially below potential GDP, but real GDP might change more (and prices less) when real GDP is initially above potential GDP. C. The size of the multiplier would not be affected by the "state of the economy"-whether real GDP is above or below potential GDP-because all studies indicate that real GDP (and prices) change by the same amounts in response to fiscal policy changes regardless of whether real GDP is above or below potential GDP. D. The size of the multiplier might be affected by the "state of the economy"-whether real GDP is above or below potential GDP-in that real GDP might change more in response to fiscal policy changes (and prices less) when real GDP is initially below potential GDP, but real GDP might change less (and prices more) when real GDP is initially above potential GDP. b. The authors note that it is difficult for economists to conduct these studies because of a "historical rarity." What might be a historically rare event in this context? A. Slower than normal economic growth in an environment of historically low interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are higher. B. Higher than normal economic growth in an environment of historically low interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are higher. C. Slower than normal economic growth in an environment of historically high interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are lower. D. Higher than normal economic growth in an environment of historically high interest rates for a decade after the Great Recession-the historical rarity-suggests that estimates of the size of the fiscal multiplier for this period may not be applicable to more normal times when interest rates are lower.

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