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Magnitude of the government expenditures multiplier

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Reference no: EM132422543

During the 2007-2009 "Great Recession" Presidents Bush and Obama unleased a combined total of almost one trillion dollars of new federal "stimulus" on the economy. Using a very simple Keynesian model (such as Models and Multipliers Model II), if we assume an MPC in the range of 0.8, that would suggest that aggregate income should increase by some $5 trillion.

(A) If we now consider a more "realistic" model (such as Models and Multipliers, Model VII), what does that do to the magnitude of the government expenditures multiplier? Explain!

(B) During that recession Congress passed and the President signed an $830 billion "stimulus package" (the 2009 American Recovery and Reinvestment Act) that proponents claimed would ensure that unemployment did not reach 8%, and even bring it down to 5% by the end of 2013. The actual results were nowhere near that. Explain why the rosy projections/model missed the mark to such an extent.

Reference no: EM132422543

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