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Effect of Economic Stimulus Under 2 Macroeconomic Theories

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1. The federal government has recently enacted several large spending bills (i.e. economic stimulus). Use the Modern Keynesian aggregate supply and demand system to tell which curve(s) shift and in which direction. Explain how the price level will be affected by these expenditures in the short-run. Explain how GDP is affected in the long-run.

2. Conduct the same exercise as in #1 using the Classical model. Explain how the price level will be affected by these expenditures in the short-run. Explain how GDP is affected in the long-run.

3. Compare your results from #1 and #2. Are the results different? Explain.

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Solution Summary

This solution analyzes and contrasts the effects of an economic stimulus according to the Keynesian and Classical economic theories.

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1. The recession is caused by a shortage of demand in the economy. The government wants to shift the Aggregate Demand (AD) curve to the right. Because AD = C + I + G + X - M, the government can increase AD (and shift ...

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