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Macroeconomics: Fiscal Stimulus

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Hi, I need some assistance with the following question:

Fiscal Policy under the Obama Administration: The pattern of spending and revenues by the federal government in the next 10 years (and even the next 50 years) looks problematic. On the other hand, the zero lower bound on nominal interest rates suggests that conventional monetary policy has reached its limits. The fact that interest rates remain high for many borrowers in the country suggests there is scope for a fiscal stimulus (and indeed, this was one justification for the American Recovery and Reinvestment Act of 2009).

Suppose President Obama asks for your advice. In particular, he'd like you to propose one fiscal policy change that you think would be beneficial to the economy. Explain the policy change that you would recommend and how this change would be financed.

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One of the most effective fiscal stimulus for mitigating the impact of recession in the immediate period could be a set of incentives, such as sales tax buyout. Britain recently reduced its VAT by 2.5 percentage points for the next 13 months to compel consumers to spend more in order to take advantage of this tax cut and thus, boost consumer spending in the economy.

The main advantage of such small incentive for a limited time frame is the fact that they are targeted to be effective in the time frame when recession is expected to be the ...

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President Obama pushed his massive fiscal stimulus

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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