(a) Represent the US economy in a three-equation model. (b) Explain how the fiscal stimulus affect the economy, the potential multiplier effect of this stimulus considering the US current situation, and the potential limitations (if any) of the US policy mix adopted. (300 words max)
In the Financial Times article, “Fed signals no rate rise until at least 2024 despite growth
upgrade” (17 March 2021), we can read:
“Federal Reserve officials signalled that they expect to keep interest rates close to
zero until at least 2024, even as they sharply upgraded their US growth forecasts
because of a massive fiscal stimulus and an accelerating vaccine rollout.
[...] The upgrades to the forecasts from Fed officials were significant: whereas in
December they predicted 4.2 percent growth this year, that estimate was bumped
up to 6.5 percent, which would be the fastest economic expansion since 1984.
Meanwhile, the
end of the year instead of 5 percent. [...] inflation [...], is expected to rise to 2.2
percent and above the central bank’s 2 percent target, compared with the smaller
rise to 1.8 percent predicted in December.
[...] The Fed has pledged to maintain rock-bottom interest rates until the US
reaches full employment, with inflation hitting 2 percent and being on track to
exceed that target.”
(a) Represent the US economy in a three-equation model.
(b) Explain how the fiscal stimulus affect the economy, the potential multiplier effect of this
stimulus considering the US current situation, and the potential limitations (if any) of
the US policy mix adopted. (300 words max)
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