Question

The COVID-19 crisis has led to unprecedented fiscal measures. Use the IS-LM curves as well as the AD-AS curves to show the impacts of Congress and President Trump’s stimulus relief actions. Be sure to label all axes and curves. In one or more paragraphs explain what should happen when we assume the MPC is 0.8 and both spending and tax measures are taken to heal the economy. What part does a democrat majority congress and a republican president play in these decisions. Also, discuss the impact on all variables and economic agents. Be sure to indicate the direction of movement for all variables.

Answer 1

Sol :-

Y = Income
r = Intrest rate
AE = Aggregate Expenditure
The economy is currently at point E1 which is below ,the full employment equilibrium output Y2 in both graph (i) and (ii). The fiscal stimulus will shift the planned aggregate expenditure curve upwards to AE(expenditure). And new equilibrium output is at Y2.

If MPC = 0.8 ,multiplier = (1/1-0.8) = 1/0.2 = 5.

Hence the output was increases by 5 times in government expenditure. Challenges like negative consumers and business intement and increased uncertainity in the economy might inpede stimulus impact of government.

As government increases his spending , the AE curve shifts move upward and coreesponding to that the IS curve also right from IS1 to IS2. Intrest rate and Income level both increase from r1 to r2 and Y1 to Y2 respectively.