Economic rationale - enacting large fiscal stimulus package, Microeconomics

1) The $787 billion stimulus package, "American Recovery and Reinvestment Act" passed in Winter 2009 contained a mix of tax rebates, tax credits and increases in various transfer payments (such as extension of unemployment compensation). It also contained funding for a large number of infrastructure spending projects and some funding for scientific research. Most republican legislators voted against the proposed stimulus bill on the grounds that it should have contained more tax cuts and less infrastructure/research spending.

A) Briefly explain the economic rationale for enacting a large fiscal stimulus package, given the macroeconomic condition of the US economy four years ago.

B) Describe and contrast the "multiplier effects" on AD of each $1 billion of tax cuts/transfer increases with the "multiplier effects" on AD of each $1billion of increased infrastructure spending. (Which has the larger multiplier effect or are they both the same?) Assume in both cases that the lower tax rates and higher infrastructure expenditure levels would be phased in over a 2 year period and are assumed to continue indefinitely following that. (This answer is worth 6 points implying that some detail is required for full credit ). 

Posted Date: 3/29/2013 2:54:05 AM | Location : United States

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