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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.鈥� 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

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)?

Go to the St. Louis Federal Reserve FRED database, and find data on Personal Consumption Expenditures (PCEC), Personal Consumption Expenditures: Durable Goods (PCDG), Personal Consumption Expenditures: Nondurable Goods (PCND), and Personal Consumption Expenditures: Services (PCESV).

a. Using the most recent data, what percentage of total household expenditures is devoted to the consumption of goods (both durable and nondurable goods)? What percentage is devoted to services?

b. Given these data, which specific component of household expenditures would be most impacted by a reduction in overall household spending? Explain.

In each of the following cases, determine whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.

a. The real interest rate rises.

b. The marginal propensity to consume declines.

c. Financial frictions increase.

d. Autonomous consumption decreases.

e. Both taxes and government spending decrease by the same amount.

f. The sensitivity of net exports to changes in the real interest rate decreases.

g. The government provides tax incentives for research and development programs for firms.

Why is inventory investment counted as part of aggregate spending if it isn鈥檛 actually sold to the final end user?

If an increase in autonomous consumer expenditure is matched by an equal increase in taxes, will aggregate output rise or fall?
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