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Comparing 2 Fiscal Policy Options

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Which of the following changes to fiscal stimulus package of 2009 for $862 billion (under the bill called American Recovery and Reinvestment Act of 2009) would have a larger overall impact on AD? Explain your answer with credible logic and analysis.

A) A program of tax rebates, distributed uniformly across the population of those filing tax returns, amounting to $862 billion in total rebates.


B) An $862 billion increase in federal government spending on repairs to highways and bridges, including other related infrastructure.

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Solution Summary

This solution uses numerical analysis to determine which of two proposed fiscal policies (a stimulus package and a tax cut) would have a greater impact on Aggregate Demand (AD).

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Plan B would have a greater effect. Plan B's effect on AD would have two components: the increase in government spending (G) and the increase in consumption spending (C) in response to the increase in ...

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