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    The Recovery and Reinvestment Act

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    The recently passed (Winter, 2009) "American Recovery and Reinvestment Act" contains a mix of tax rebates, tax credits and increases in various transfer payments (such as extension of unemployment compensation). It also contains funding for a large number of infrastructure spending projects and some funding for scientific research. Most republican legislators voted against the proposed stimulus bill on the grounds that it should have contained more tax cuts and less infrastructure/research spending.

    A) Briefly explain the economic rationale for enacting a large fiscal stimulus package at this time.

    B) Compare and contrast the "multiplier effects'' on AD of $1 billion of tax cuts/transfer increases with the multiplier effects on AD of $1billion of increased infrastructure spending. Assume in both cases that the timing of the tax cuts/expenditures occurs over a 2 year period.

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    Solution Preview

    When the economy is in a recession, it indicates that people have cut back on their spending. Through the multiplier effect this drop in spending ripples through the economy, causing layoffs and further declines in spending. The government hopes to intervene in this cycle, by injecting spending into the economy so that fewer people are laid off. If this spending is ...

    Solution Summary

    How the government attempts to reinvigorate the economy during recessions