In response to onset of the 2007-2009 “Great Recession” both Presidents Bush and

Question

In response to onset of the 2007-2009 “Great Recession” both Presidents Bush and Obama proposed and got approval for economic “stimulus” packages—totaling almost $1 trillion is government outlays and tax cuts. (The Bush Economic Stimulus Act 2008 was estimated at $152 billion and the Obama American Recovery and Reinvestment Act 2009 was estimated at $787 billion.) Based on a simple Keynesian multiplier (such as Model II in Models and Multipliers), if the U.S. MPC was in the range of 0.8 to 0.9, this would suggest that income should have increased somewhere in the range of $4.75 trillion to almost $10 trillion. The actual impact was NOWHERE near that. Using the various tools and analysis from this course (including the IS-LM framework, and considering that the actual economy is more akin to Model VII than to Model II), and other principles discussed, explain why there would be such a discrepancy between the multiplier formula results and actual outcome.

Explanation / Answer

Investment Multiplier leads to the rise in income which is multiple. Value of Investment multiplier depends on the MPC. Higher MPC, more would be investment multiplier. Leakages in forms of saving and import reduce the multiplier effect. hence, here actual impact was nowhere near the target calculated based on MPC.

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