Which of the following changes to fiscal policy would have a larger overall impact on Aggregate Demand? Explain your answer in a paragraph or 2.
-A program of tax rebates, distributed uniformly across the population of those filing tax returns, amounting to $10 billion in total rebates.
-A $10 billion increase in federal government spending on repairs to highways and bridges.
Aggregate demand is the demand for goods and services. So, let's think about what would happen in the case of a tax return. Actually, this actually occurred a few years ago, as an attempt to jumpstart the economy. (It turned out that it wasn't exactly a rebate, but most people didn't know that. Look here: http://boren.nu/archives/2001/07/26/surprise-tax-rebate-not-a-rebate/)
When the money was received, it wasn't really that much. Certainly, some people probably rushed out and spent it. But based on my ...
Effects of tax rebates and government spending on supply and demand.
The effects of fiscal policy, specifially the 2008 tax rebate.
(a) According to the News article, how much more did the average household spend on appliances, electronics, and furniture when it received the 2008 tax rebate?
(b) If the MPC was 0.9, how much would cumulative spending increase as a result?
I N T H E N E W S
Just How Stimulating Are Those Checks?
To get an idea of how much those government rebate checks have spurred spending - and who's benefiting
from the buying - business school professors Jonathan Parker (Northwestern) and Christian Broda (University
of Chicago) analyzed the spending of 30,000 rebate receiving households. Using data provided by AC-Nielsen's
Homescan, whose participants scan the bar codes on their purchases into a database, the researchers found
the rebates "clearly have increased household spending," Parker says. Lower-income households boosted
consumption most - spending 6% more, compared with a 3.5% rise across all households.
Source: BusinessWeek, September 8, 2008, p. 14.
Analysis: The 2008 tax cuts were a form of fiscal stimulus that boosted consumption (personal spending), increased real GDP growth, and reduced unemployment.
The 2008 rebate boost
Additional dollars spent due to stimulatus check:
Appliance, electronic and furniture $91
Entertainment and personal services $87
Food, health, beauty and household products $60
Clothing, shoes and accessories $32