The U.S. Department of the Treasury recently donated $5 billion in cash foreign aid to several...

The U.S. Department of the Treasury recently donated $5 billion in cash foreign aid to several Carribbean island nations that were hard hit by deadly hurricanes both last year and this year. The U.S. Treasury Department made it clear that this humanitarian aid donation does not need to be repaid to the U.S. and those Carribbean governments can use the money for whatever they think was necessary. Conclusion: This type of government spending directly stimulates the U.S. GDP according to the Keynesian macroeconomic theory.

true or false?

Expert Solution

According to the Keynesian macroeconomic theory, government spending done on purchase of domestically produced final goods and services directly stimulates the GDP.

This is because government spending done on purchase of domestically produced final goods and services is a component of aggregate demand. So, when such government spending is undertaken then it leads to an increase in aggregate demand.

This increase in aggregate demand results in an increase in GDP.

In the given case, US Department of Treasury has donated $5 billion in cash foreign aid to several Carribbean island nations.

This aid is referred to as transfer payment and does not constitute the government spending on domestically produced final goods and services.

Transfer payments are not included in GDP.

Thus,

This type of government spending is a transfer payment and thus will not stimulate the US GDP according to the Keynesian macroeconomic theory.

Hence, the given statement is False.

Rahul Sunny answered 2 years ago

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