Question

In February 2008, President Bush signed into law a $170 billion economic stimulus package. This package consisted of a tax rebate to eligible taxpayers and others. Discuss what type of fiscal policy this stimulus package represented and assuming the marginal propensity to save of average U.S. citizens is approximately 12% compute the estimated the impact on the economy of this economic policy initiative. In addition discuss if this policy was or was not effective in reducing the recessionary gap.

Answer 1

The stimulus package by the government was aimed at creating the aggregate demand in the economy. The rise in the aggregate demand in the economy was likely to drive up the output and employment levels in the economy.

The tax multiplier value = 1/1-MPC

= 1/0.12

= 8.33

The rise in the total aggregate demand = 8.33*170

= 1416.1

The total rise in the income shall be equivalent to the 1416.1 billion.

But in reality, the rise in the income was not equal to the or near 1416 billion dollars. The leakages in the form of import and the further rise in the saving propensity led to the smaller rse in income level following the roll-out of the stimulus packages.