Assignment:
1. Assume that consumers in economy XYZ spend, on average, 80% to 90% of any new (additional) disposable income to purchase goods and services. Based on a simple three-sector Keynesian type economy (such as Model II in our "Models and Multipliers" Doc Sharing), this might suggest a government expenditures multiplier in the range of 5 to 10, and a tax multiplier in the range of -4 to -9. In this country, the Obama "stimulus package" of some $830 billion (2009 ARRA) produced nothing even remotely resembling such income increasing results.
The question: Explain! [Note: In your answer you are not restricted to this model (or any other particular model configuration).] In short, there seems a very significance divergence between "the theory" and "the reality" regarding the effectiveness of fiscal stimulus. How does one account for that?
2. In addition to the failure of the $830 billion "stimulus package" to produce the kind of "GDP bump" promised by proponents of the program, it also failed to deliver on the claim that it would ensure that the U.S. unemployment rate would not reach 8%, and that it would even bring the rate down to 5% by the end of 2013.
The question: Explain!
3. If the current income level in a market driven economy is above equilibrium, macroeconomic theory suggests that an automatic adjustment will take place.
The questions: (a) How does the economy know that it is not in equilibrium and that an adjustment should take place? (b) What would cause the adjustment to occur? (c) What would be the nature of the adjustment? (d) How would the economy know when to stop adjusting?