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Chapter 21: Q15 (page 566)

The fiscal stimulus package of 2009 caused the IS curve to shift to the left, since output decreased and unemployment increased after the policies were implemented.” Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The statement about Fiscal Stimulus -that it decreased output & increased unemployment, is True

Step by step solution

01

Introduction

Fiscal Stimulus Package of 2009 was designed by Obama government to address the issue of US crisis 2008. The unemployment rate had risen to 7.6% in December 2009.

The package included $288 billion in tax cuts for households & businesses, $499 billion in increased federal spending.

02

Explanation 

The package increasing government expenditure & decreasing taxes was expected to shift IS curve to the right, and increase aggregate output level at levels of interest rate.

It rather happened vice versa - most government purchases didn't kick until 2010, decline in autonomous consumption & investment due to economical frictions more than offset the fiscal stimulus.

So, Aggregate Demand rather decreased & IS curve didn't shift, the plan failed.

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Most popular questions from this chapter

When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.

Consider an economy described by the following data:

C=\(4trillionI=\)1.5trillionG=\(3.0trillionT=\)3.0trillionNX=\(1.0trillionf=0

mpc = 0.8

d = 0.35

x = 0.15

a. Derive an expression for the IS curve.

b. Assume that the Federal Reserve controls the interest rate and sets the interest rate at r = 4. What is the equilibrium level of output?

c. Suppose that a financial crisis begins and f increases to f = 3. What will happen to equilibrium output? If the Federal Reserve can set the interest rate, then at what level should the interest rate be set to keep output from changing?

d. Suppose the financial crisis causes f to increase as indicated in part (c) and also causes planned autonomous investment to decrease to I = \)1.1 trillion. Will the change in the interest rate implemented by the Federal Reserve in part (c) be effective in stabilizing output? If not, what additional monetary or fiscal policy changes could be implemented to stabilize output at the original equilibrium output level given in part (b)?

Suppose that Dell Corporation has 20,000 computers in its warehouses on December 31, 2019, ready to be shipped to merchants (each computer is valued at

\(500). By December 31, 2020, Dell Corporation has 25,000 computers ready to be shipped, each valued at \)450.

a. Calculate Dell’s inventory on December 31, 2019.

b. Calculate Dell’s inventory investment in 2020.

c. What happens to inventory spending during the early stages of an economic recession?

If the marginal propensity to consume is 0.75, by how much would government spending have to rise to increase output by \(1,000 billion? By how much would taxes need to decrease to increase output by \)1,000 billion?

“Since inventories can be costly to hold, firms’ planned inventory investment should be zero, and firms should acquire inventory only through unplanned inventory

accumulation.” Is this statement true, false, or uncertain? Explain your answer
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