From March 2020 to March 2021, the US enacted three fiscal packages to stimulate the economy and support businesses and households following the dislocations of COVID19. The rationale for these temporary payments was based on the Keynesian consumption function, according to which an increase in income increases consumption spending and boosts the economy. The data shown in the chart on the next page for disposable income, with and without the stimulus payments, and personal consumption expenditures. While disposable income clearly rises substantially when the stimulus payments are included, personal consumption expenditures follows a different path, mimicking disposable income without the stimulus payments. Use economic theory to explain what is going on here, Billions of Dollars 22,000 Disposable Personal Income less Economic Impact Payments Disposable Personal Income with Economic impact Payments 20,000 Personal Consumption ExpenditureS 18,000 16,000 14,000 12,000 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 2017 2018 2019 2020 2011
From March 2020 to March 2021, the US enacted three fiscal packages to stimulate the economy and support businesses and households following the dislocations of COVID19. The rationale for these temporary payments was based on the Keynesian consumption function, according to which an increase in income increases consumption spending and boosts the economy. The data shown in the chart on the next page for disposable income, with and without the stimulus payments, and personal consumption expenditures. While disposable income clearly rises substantially when the stimulus payments are included, personal consumption expenditures follows a different path, mimicking disposable income without the stimulus payments. Use economic theory to explain what is going on here, Billions of Dollars 22,000 Disposable Personal Income less Economic Impact Payments Disposable Personal Income with Economic impact Payments 20,000 Personal Consumption ExpenditureS 18,000 16,000 14,000 12,000 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 01 2017 2018 2019 2020 2011
Chapter18: The Keynesian Model
Section: Chapter Questions
Problem 9SQP
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Transcribed Image Text:From March 2020 to March 2021, the US enacted three fiscal packages to stimulate the
economy and support businesses and households following the dislocations of COVID19. The
rationale for these temporary payments was based on the Keynesian consumption function,
according to which an increase in income increases consumption spending and boosts the
economy. The data shown in the chart on the next page for disposable income, with and
without the stimulus payments, and personal consumption expenditures. While disposable
income clearly rises substantially when the stimulus payments are included, personal
consumption expenditures follows a different path, mimicking disposable income without the
stimulus payments. Use economic theory to explain what is going on here,
Billions of Dollars
22,000
Disposable Personal Income less Economic Impact Payments
Disposable Personal Income with Economic impact Payments
20,000
Personal Consumption Expenditures
18,000
16,000
14,000
12,000
01 04 07 10 01 04 07 1o 01 04 07 10 01 04 07 10 01
2017
2018
2019
2020
2021
Economic Impact Payments and Consumption
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