Question

In: Economics

On September 29, 2008, Congress failed to pass a spending bill that would have provided a...

On September 29, 2008, Congress failed to pass a spending bill that would have provided a fiscal stimulus in the face of panic in financial markets. Why did stock market values fall in response to this news? As part of your answer, explain what a fiscal stimulus is intended to do in terms of an aggregate supply/aggregate demand diagram. Be specific about which curve would shift and in which direction. What would happen to the overall price level and unemployment?

Solutions

Expert Solution

Amidst the financial crisis of 2008-09, the Congress failed to pass a spending bill, which translated into a stock market decline. To elaborate on the reason, the first point to note is that when the economy is in a slowdown or recession, the government pursues expansionary fiscal policy. This includes reduction in tax rate and/or increase in government spending.

The objective of the fiscal stimulus is to increase aggregate demand. In other words, shift the aggregate demand curve to the right that would represent higher output and higher price levels (higher inflation) in the economy.

Just as an example, if the government reduces taxes, consumer disposable income increases. This triggers higher consumption spending in the economy, which also boosts investment spending. Therefore, as consumption and investment increase on a relative basis, the aggregate demand curve shifts to the right. At the same time, relatively higher investment spending creates jobs (reduces unemployment ) in the economy.

Further, when the stimulus package it intended to increase government spending, it also has a positive impact on aggregate demand and shifts the curve to the right. Price levels in the economy increase and jobs are created. Just as an example, when the government increases infrastructure spending, it creates jobs and boosts industries related to infrastructure. Similarly, if the government increases defense spending, it triggers growth for defense sector companies.

Therefore, the failure to pass the spending bill implied that government spending in the economy will not increase and therefore the stock markets reacted negatively. Had government spending increased and triggered higher growth, the stock markets would have reacted positively.


Related Solutions

WASHINGTON — The House failed on Thursday to advance a constitutional amendment that would require Congress...
WASHINGTON — The House failed on Thursday to advance a constitutional amendment that would require Congress not spend more than the nation collects in revenue. Some conservative lawmakers had hoped a vote on the bill would calm grassroots conservatives who had been fuming about recent high levels of spending. On a mostly party line vote, Republicans failed to advance the bill, 233-184. Normally, legislation requires 218 votes to win approval in the House and can be passed with just Republican...
1. Identify factors that would cause consumption spending to increase. What effect would that have on...
1. Identify factors that would cause consumption spending to increase. What effect would that have on aggregate demand? 2.. Explain the concept of autonomous consumption. Note :- Please avoid Plagiarism
Would you rather have had a DB or a DC in the summer of 2008? Explain.
Would you rather have had a DB or a DC in the summer of 2008? Explain.
Why would Congress have power under the Civil Rights Act of 1964 to require restaurants and...
Why would Congress have power under the Civil Rights Act of 1964 to require restaurants and hotels to not discriminate against interstate travelers on the basis of race, color, sex, religion, or national origin? Suppose the Holiday Restaurant near I-80 in Des Moines, Iowa, has a sign that says, “We reserve the right to refuse service to any Muslim or person of Middle Eastern descent.” Suppose also that the restaurant is very popular locally and that only 40 percent of...
How did Congress devise the Medicare D drug benefit? Would you have designed it in that...
How did Congress devise the Medicare D drug benefit? Would you have designed it in that way? What would you have done differently and why? Should physicians be allowed to purchase their own imaging equipment? Why or why not?
As a business person, would you have wanted your senators and US congress representative to vote...
As a business person, would you have wanted your senators and US congress representative to vote for the tax cut of 2008? How did they actually vote? Please find out
DEFINE FISCAL POLICY. WOULD THE INCREASE OF $100 IN GOVERNMENT SPENDING HAVE THE SAME EFFECT ON...
DEFINE FISCAL POLICY. WOULD THE INCREASE OF $100 IN GOVERNMENT SPENDING HAVE THE SAME EFFECT ON GDP AS OF DECREASE IN TAXES OF $100? WHY OR WHY NOT?
Describe the effect of government's cutting spending would most likely have on: (1) the aggregate demand...
Describe the effect of government's cutting spending would most likely have on: (1) the aggregate demand curve (2) inflation (3) unemployment rate
Your grandparents put $12,000 into an account so that you would have spending money in college....
Your grandparents put $12,000 into an account so that you would have spending money in college. You put the money into an account that will earn 4.55 percent compounded monthly. If you expect that you will be in college for 4 years, how much can you withdraw each month?
Consider the recent 2008-2009 financial crisis: Would the normal principles of diversification have worked for investors...
Consider the recent 2008-2009 financial crisis: Would the normal principles of diversification have worked for investors during this crisis? Why or why not? What are lessons learned for the future?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT