In February 2008 President Bush signed into law a 170 billio

In February 2008, President Bush signed into law a $170 billion economic stimulus package. This package consisted of a tax rebate to eligible taxpayers and others. Discuss what type of fiscal policy this stimulus package represented and assuming the marginal propensity to save of average U.S. citizens is approximately 12% compute the estimated the impact on the economy of this economic policy initiative. In addition discuss if this policy was or was not effective in reducing the recessionary gap.

Solution

Ans

Mps =12%=1(12%)=0.12

Mpc=1-0.12=0.88

Tax multiplier = mpc/1-mpc=0.88/0.12=7.33

Impact on economy (rise in national income or gdp) =7.33(170)=1247 billion This is expansionary fiscal policy. This was not individually effective but combined with expansionary fiscal policy and bailouts the policy provide sufficient to save usa economy