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Stimulus effects on the economy

Using Keynesian cross model diagram, critically and briefly illustrate the short run and long run economic impact of Obama's stimulus package of $787 billion. (Hint: The impact will be in terms of major macroeconomic variables of US economy such as GDP growth, unemployment rate, and inflation.

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According to the Keynesian Cross model, the expenditure of households, firms, foreigners and the government on domestic goods and services is expressed as E= C + I + G + NX. Consumption (C) can further be expressed as C + b(Y − T ), where b is the marginal propensity to consume, Y is income and T is taxes.

Thus we have
E = C + b(Y − T )+ I + G + NX

If we draw a graph of these with expenditure on the vertical axis and production on the horizontal, equilibrium is represented as a 45-degree line (slope of 1) where Y=E. This expresses the accounting identities income = production and investment = savings.

The expenditure line, on the other hand, has a slope of less than one. This causes an intersection of the aggregate demand curve and the 45 degree line. This is equilibrium, where there is a balance between aggregate expenditures and aggregate production. At this point, there are no economy-wide surpluses or shortages because buyers buy all they want and sellers sell all they have. When actual GDP is increases above the ...

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Economic effects of Obama's stimulus package

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