Question

In: Economics

In February 2008 President Bush signed into law the Economic Stimulus Act of 2008. The primary...

In February 2008 President Bush signed into law the Economic Stimulus Act of 2008. The primary purpose of this legislation was to provide households with onetime cash payments of up to $1200 (up to $600 for individual tax filers, up to $1200 for joint tax filers). The intent of the legislation was to encourage households to increase consumption expenditures, which would in turn increase production, which would in turn cause a rise in GDP (the US was entering a recession in 2008).

For your initial discussion post, if you were not old enough to receive a check in 2008 (or if you didn't get one because your parents were claiming you as a dependent on their taxes), discuss how you think a typical family would have responded to the receipt to this one time payment. If you did get one of these checks in 2008, use your initial post to tell us what you did with the money.

discuss what effect the actions listed in the initial post likely had on production and real GDP.

Solutions

Expert Solution

In February 2008 President Bush signed into law the Economic Stimulus Act of 2008. The primary purpose of this legislation was to provide households with onetime cash payments of up to $1200 (up to $600 for individual tax filers, up to $1200 for joint tax filers). The intent of the legislation was to encourage households to increase consumption expenditures, which would in turn increase production, which would in turn cause a rise in GDP.

I think a typical family would have responded to the receipt to this one time payment by saving a portion of it in different possible forms and spending another portion for buying different goods and services. If I got one of these checks in 2008, I would have done the same thing with it. Though the government expects us to spend the whole money in buying different goods and services to stimulate the economy but a rational consumer do not consume(spend) all the extra money which they get. Though the ratio of the saving and spending will be different for different individuals. Some will spend more and save less and others may act in opposite way.

The act of Saving will not effect the production and real GDP as it will not increase demand and hence if there is no increase in demand there is no possibility of increase in production and supply and hence real GDP remains same.

But the act of spending will effect the production and real GDP positively because when people spend more money in buying goods and services this increases demand in the market and hence to fulfill this increased demand there will be need to increase production and hence the real GDP (amount of goods and services) will increase in the economy.

So the economic stimulus act must surely have increased the production and real GDP but the extent of it will depend on the proportion of the increased income which is spent.


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