Reference no: EM133132511

Under the 2020 CARES Act, the U.S. government distributed checks of $1,200 per qualifying individual. Married couples making up to $150,000 and single individuals making up to $75,000 were eligible for the full $1,200. Those making above these amounts - up to $198,000 (married) or $99,000 (single) - were eligible for a smaller stimulus check. The government hopes that stimulus checks have a strong multiplier effect.

Define the 'multiplier effect'. What is the logic behind the multiplier?

What if stimulus checks were limited to those making around $50,000? Would the multiplier likely be higher or lower than the multiplier for the stimulus checks as described above? Explain your reasoning.

The textbook (Section 16.4 from assigned readings) notes that: "We would expect the tax multiplier to be smaller in absolute value than the government purchases multiplier." Given this, which of these two policies - decreasing taxes or increasing government purchases - might the government favour to stimulate GDP (considering a COVID-19 pandemic type shock to GDP) in the short run? What long-run considerations might temper this choice? Justify your answers.