To deduce the fiscal policy equivalent of a 0.5 percent cut in long-term interest rates, we can use the proportional relationship given in Bernanke's policy guide. The relationship indicates that a 0.25 percent (or 1/4 point) reduction in long-term interest rates is equivalent to a [tex]$50 billion fiscal stimulus.
We can break down the solution into the following steps:
1. Understand the Proportional Relationship: A 0.25 percent reduction in interest rates corresponds to a $[/tex]50 billion fiscal stimulus.
2. Establish the Proportion: Given this, we can express the fiscal stimulus equivalent of a 0.5 percent reduction using a proportion. If 0.25 percent equals [tex]$50 billion, we need to find the amount that 0.5 percent would correspond to.
3. Set Up the Equation:
\[
\text{If } 0.25\text{ percent is equivalent to } \$[/tex]50 \text{ billion, then }\ 0.5\text{ percent (which is twice 0.25 percent)} \
\]
4. Calculate the Fiscal Stimulus:
Since 0.5 percent is twice 0.25 percent, the equivalent fiscal stimulus will also be twice the [tex]$50 billion figure:
\[
0.5 \text{ percent } = 2 \times \$[/tex]50 \text{ billion} = \[tex]$100 \text{ billion}
\]
Thus, the fiscal policy equivalent of a 0.5 percent cut in long-term interest rates is:
\$[/tex] 100 billion:
(Click to select) Fiscal stimulus
