--%>

Federal fiscal stimulus in 2009

Question:

Was the stimulus package passed in 2009 as success?  In answering this question the focus should be the articles on the syllabus, but you should also include opinions of other commentators.   Your answer should also describe why coming to a clear conclusion on this issue is difficult.

Answer:

To start with, the federal fiscal stimulus in 2009 was not as big as it could have been, and as it seems to naked eyes. The federal stimulus was accompanied by a spending cut by the state and local bodies. This, in effect, led to a very small resultant increase in the federal spending.

To discuss the performance of the economy after the stimulus, we have the data to show how the economy is performing. So the FOMC report concludes that there has been an increase in unemployment, a fall in household consumption expenditure, housing sector is still to recover, and the nonresidential structure sector is also in a bad shape. To add to the problems, inflation rate is high due to the high prices of the essential commodities. More so importantly, the tax cuts which were supposed to induce the households to increase their spending, and hence increase the aggregate demand, have mostly failed in their mission. So, overall we may that the economy is still in a bad shape and it may seem easy to assume that the fiscal stimulus has failed to revive the economy.

However, there is something to ponder about here. What would have been the state of the economy had the fiscal stimulus not been provided? Would it have been the same, better or worse? It is true that the tax cuts of 2008 induced only 25% of the households to increase their consumption, and the ARRA stimulus tax cuts were associated with only 13% of households increasing their consumption, nevertheless, there was an increase in the consumption and hence aggregate demand. Households are supposed to smoothen out their consumption rather than acting abruptly to a tax cut. But the point under consideration is that had these tax cuts not taken place, wouldn't the households' and overall economic expenditure had been even lower? The answer is yes. There might have been a downward spiral of declining aggregate demand and spending. The stimulus at least brought some kind of relief.

Therefore, three things come to fore. First, the full gains of the stimulus were not realized due to a simultaneous cut back by state governments. Second, the gains from the stimulus are not as big as expected and the economy is still in a state of uncertainty. Third, the situation could have been even worse in the case of absence of stimulus, however, it this assertion cannot be tested easily.

   Related Questions in Macroeconomics

  • Q : Problem on full employment Does full

    Does full employment take place if AD = AS or S = I?

  • Q : Problem on slope of demand curve The

    The demand curve for DVD games is a straight line, therefore its slope: (1) Is constant, although price elasticity of demand drops/falls as output increases. (2) Price elasticity are both stable. (3) Is constant, although price elasticity of demand increases as the pr

  • Q : GDP In calculating the GDP national

    In calculating the GDP national income accountants:

  • Q : Why government taken as capital receipt

    Why the borrowings by Government are taken as capital receipts?

  • Q : National income how to calculate

    how to calculate national income under value added method

  • Q : FED targeting the interest rate versus

    What is the main difference between FED targeting the interest rate versus inflation and which one is Bernanke using nowadays? Name some countries which use this method nowadays.

  • Q : POSSIBILITIES Possibilities Food

    Possibilities Food (millions of tons per year) Tractors (millions per year) A 0 30 B 4 28 C 8 24 D 12 20 E 16 14 F 20 8 G 24 0 a. Is it possible for this nation to produce thirty million tons of food per year? Why or why not. b. Is it possible for this nation to produce thirty million

  • Q : Define Devaluation Devaluation means

    Devaluation means decrease in the external value of a country’s currency as an aware policy measure adopted by the Government of a country. In another words, we make our currency less costly in terms of foreign currency. This builds our goods ch

  • Q : One party to a transaction deceives

    If one party to a transaction deceives another party prior to a deal be reached, this is termed as: (i) Bad luck. (ii) Adverse selection. (iii) Moral hazard. (iv) Polyandry. (v) Rational ignorance. Please someone suggest me the rig

  • Q : Moentary policy a restrictive monetary

    a restrictive monetary policy is designed to shift the