--%>

Federal fiscal stimulus in 2009

Question:

Was the stimulus package passed in 2009 as success?  In answering this question the focus should be the articles on the syllabus, but you should also include opinions of other commentators.   Your answer should also describe why coming to a clear conclusion on this issue is difficult.

Answer:

To start with, the federal fiscal stimulus in 2009 was not as big as it could have been, and as it seems to naked eyes. The federal stimulus was accompanied by a spending cut by the state and local bodies. This, in effect, led to a very small resultant increase in the federal spending.

To discuss the performance of the economy after the stimulus, we have the data to show how the economy is performing. So the FOMC report concludes that there has been an increase in unemployment, a fall in household consumption expenditure, housing sector is still to recover, and the nonresidential structure sector is also in a bad shape. To add to the problems, inflation rate is high due to the high prices of the essential commodities. More so importantly, the tax cuts which were supposed to induce the households to increase their spending, and hence increase the aggregate demand, have mostly failed in their mission. So, overall we may that the economy is still in a bad shape and it may seem easy to assume that the fiscal stimulus has failed to revive the economy.

However, there is something to ponder about here. What would have been the state of the economy had the fiscal stimulus not been provided? Would it have been the same, better or worse? It is true that the tax cuts of 2008 induced only 25% of the households to increase their consumption, and the ARRA stimulus tax cuts were associated with only 13% of households increasing their consumption, nevertheless, there was an increase in the consumption and hence aggregate demand. Households are supposed to smoothen out their consumption rather than acting abruptly to a tax cut. But the point under consideration is that had these tax cuts not taken place, wouldn't the households' and overall economic expenditure had been even lower? The answer is yes. There might have been a downward spiral of declining aggregate demand and spending. The stimulus at least brought some kind of relief.

Therefore, three things come to fore. First, the full gains of the stimulus were not realized due to a simultaneous cut back by state governments. Second, the gains from the stimulus are not as big as expected and the economy is still in a state of uncertainty. Third, the situation could have been even worse in the case of absence of stimulus, however, it this assertion cannot be tested easily.

   Related Questions in Macroeconomics

  • Q : Is sale of scooter is national income

    Describe whether the sale of old scooter is comprised in national income?

  • Q : Purpose of Balance of Payment Meaning:

    Meaning: - as mentioned above, the balance of payments is a periodic accounting of international economic transactions. Each country having regular economic transactions with other countries prepares periodically the final accounts of their foreign receipts and paymen

  • Q : Calculating Trade balance Suppose the

    Suppose the value of exports of goods of a country is Rs. 1,000 crores and the value of imports of goods is Rs. 1,200 crores, what will be the trade balance (or balance of trade)?

  • Q : Supply factors in economic growth

    Briefly explain the four supply factors in economic growth?

  • Q : Explain Product Market Equilibrium. To

    To begin with, let us recall our three-sector product-market equilibrium model given as C + I + G = C + S + TTo this three-sector model, we now add the foreign trade-the exports (X) and imports

  • Q : Public debt How does an internally held

    How does an internally held public debt differ from an externally held public debt?

  • Q : Closed economy Hello. I need help with

    Hello. I need help with my assignment, I was sick and lost alot of time.My submission deadline is tomorrow i need your help i have attached the questions Thanks in advance

  • Q : Normative macroeconomic policy

    Widely accepted normative macroeconomic policy objectives include: (w) full employment and economic development. (x) allocative, productive, and distributive efficiency. (y) maximum freedom and economic profits. (z) job security and equality within th

  • Q : Concept of deflationary gap Elucidate

    Elucidate the concept of deflationary gap. Answer: Deflationary gap is the deficit in aggregate demand from the level needed to maintain full employment equilibrium

  • Q : Value of the net benefits Whenever

    Whenever consumers paid an amount for water which reflects the value of the net benefits they obtain from consuming it, water would outcome: (1) Maximum consumer excess. (2) Zero consumer excess. (3) Total revenue equivalent to variable cost. (4) Zero