Question

During the last recession, the Obama administration issued a stimulus package of $787 billion to get the economy through the recession. The stimulus package has 3 main parts:

(1) Tax cut for individuals, increased unemployment insurance benefits
(2) Spending on health care, education, and infrastructure investment
(3) Federal loans and grants for business
Explain in word how each stimulus part affects the aggregate demand curve. Hint:

- The aggregate demand curve increases when the aggregate quantity demanded increases for all price levels,

- The aggregate quantity demanded only increases when any of the usual components of real GDP increases (consumption, investment, government purchase, and net export). In other word, your answers need to link between the stimulus part with any of the GDP component.

Answer 1

With stimulus, aggregate demand curve will shift to right. Measures included in the stimulus affects aggregate demand curve in the following ways.

* Taxcuts for individuals

Every tax payer losses a part of their income in the form of taxes. When taxrates are cut, it means that income available with the consumer for spending (disposable income)will increase , co consumption will rise. Similarly taxcuts be incentive to work and invest. Since there is an increase in major components consumption and investment, aggregate demand curve will rise.

* Spending on healthcare education and infrastructure.

The increase in government spending in education and investment will be a great contribution to human capital formation.spending incurred for infrastructure development will be instrumental in attracting investment.With government intervention in educational and health care sector, people, especially the disadvantaged section won't have to suffer much and will be able to utilise their income for more productive purposes. Therefore consumption, investment and government Expenditure rises , which ultimately lead to the Increases in aggregate demand.

* Federal loans and grants for business.

When loans are given at low rates or simpler terms, borrowing becomes less costly which stimulates lnvestment and production activities based on borrowing. Providing grants will further contribute to it. With the businesses expanding and new businesses starting, employment opportunities will increase. People get more income, as income Increases, consumption increases. On the other hand , with the help of government aid production will increase and exporting will become possible for more firms, companies will also focus on import substitution which will result in rise in net Exports. . Increase in its four components -consumption, investment, government Expenditure and net Exports will create the much required shift in aggregate demand to bring the economy back on track.

l