The US economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economics Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the US is 0.5. Then calculate the resulting change in real GDP arising from $700 billion in payments. b. Illustrate the effect on real GDP with the use of a graph depicting the income-expenditure equilibrium. Label the vertical axis "Planned Aggregate Spending, AE planned" and the horizontal axis "Real GDP." Draw two planned aggregate expenditure curves (AE planned 1 and AE planned 2) and a 45-degree line to show the effect of the autonomous policy change on the equilibrium.

The US economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economics Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the US is 0.5. Then calculate the resulting change in real GDP arising from $700 billion in payments. b. Illustrate the effect on real GDP with the use of a graph depicting the income-expenditure equilibrium. Label the vertical axis "Planned Aggregate Spending, AE planned" and the horizontal axis "Real GDP." Draw two planned aggregate expenditure curves (AE planned 1 and AE planned 2) and a 45-degree line to show the effect of the autonomous policy change on the equilibrium.

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 17SQ

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