In the first quarter of 2009, President Obama pushed his massive fiscal stimulus
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A) What possible macroeconomic arguments might President Obama use to defend his $862 billion fiscal stimulus package as a part of his economic recovery plans?
B) Why do you think the critics were so much concerned that this stimulus package might be bad economic policy, and not just for the US, but for the world economy? Does it sound to have a trickle down adverse effect in the current or future financial stability in the US and the World economy, say later in 2011? Do you think this issue is also related to the current political rhetoric between the GOP and Democrats on raising the debt ceiling over $16 trillion? (New debt ceiling proposed by Pres. Obama on Jan 12, 2012: http://www.foxnews.com/politics/2012/01/12/obama-requests-12t-increase-in-debt-ceiling/)?
C) What would happen to the growth rate of the money supply if foreigners lost confidence in the US dollar as a result of recent financial crisis in the US economy and the Fed was trying nonetheless to maintain its current historic low federal funds rate target? Explain briefly.
Hint: Please keep in mind that the question asked whether money supply growth rate will increase or not (by the Fed) and why so.
d) Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD (C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the textbook) and equation, critically and briefly illustrate the short run and long run economic impact of Obama's stimulus package of $862 billion (Hint: The impact will be in terms of major macroeconomic variables of US economy such as GDP growth, unemployment rate, interest rates, and inflation).
Many critics however contend that the American Recovery and Reinvestment Act of 2009 were not effective at all except too much budget deficit. But majority economists considered this stimulus package of $862 billion as too small to have a quick recovery. Do you think a second stimulus package is necessary to have a recovery faster in order to get out of this great recession? Hint: As part of your answer, you may include all pros and cons you might think of in supporting your answer.
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Solution Summary
The expert examines the possible macroeconomics arguments which might President Obama use to defend his $862 billion fiscal stimulus package as part of his economic recovery plans.
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The arguments in favor - these are all basic Keynesian, "demand side" arguments. There are many.
However, they all revolve around the notion that it is "demand" that is, the consumer, that matters, not the producer.
The consumer needs more money - they will then buy products that will stimulate demand. This means no inflation (since the money is active), jobs and more production.
Inflation will not be a problem, and rates will not change, since this money will be used to pay bills and further production through a spike in demand.
http://www.academicperspective.com/2009/12/29/bailout-and-stimulus-american-economy/ and
http://www.recovery.gov/Pages/default.aspx
The criticism of the stimulus package:
http://money.cnn.com/2009/02/13/news/economy/house_final_stimulus/index.htm and
http://www.humblelibertarian.com/2009/02/7-reasons-stimulus-package-will-be-bad.html
1. Republicans reject Keynesian "demand side" spending. Obama's bill is straight from that basic point of view - if the economy is struggling, then more money in consumer's pockets is always a good thing.
2. A common argument is "too little, too late." Not enough to make a dent.
3. Debt is too high - adding more to it (from this bill) would increase it more and threaten inflation.
4. The big issue *(that ties the whole issue together) that if production does not increase at the same time consumption does, then inflation will increase. This is because there is much more money in the system with nothing to do.
5. A huge issue here is Keynes notion that prices do NOT respond quickly to any stimulus. This might even be a contradiction to the entire Obama point of view. He is assuming that more consumption == more production/confidence.
6. The libertarian argument is that the money is coming from taxes, that is, the productive economy. This is why nothing will (or has) changed. It is taking already from productive capital and hence, because of that, cannot act as a stimulus.
7. Inflation comes up again - since much of this bill is "pork" spending, job creation is not at the root of it. This money seems targeted at local projects benefiting Congressional jurisdictions, not in creating long term ...
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