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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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