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A. What are the advantages of the Fed increasing interest rates when the GDP gap is positive?

b. What are the disadvantages of the Fed increasing interest rates when it believes the GDP gap is positive?

c. List and describe the two types of countercyclical fiscal policy.

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Use of interest rates hikes when GDP gap is positive; two types of countercyclical fiscal policy

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A positive GDP gap indicates an economy producing beyond its long term capabilities. This puts upward pressure on prices. A higher interest rate will slow economic growth, bringing economic output more in line with long-term capabilities. Thus the advantage of raising interest rates when the GDP gap is positive is that it reduces the inflation rate.

The disadvantage of this action is related to the balance of trade. When ...

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