4) In the first quarter of 2009, President Obama pushed his massive fiscal stimu

Question

4) In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862 (It was originally at $787 billion) through the Congress and later passed by the House and the Senate, whose centerpiece was spending most of this stimulus funds in repairing and building infrastructure in transportation, healthcare, science and technology, and education. Pres. Obama also urged to make a modest tax cut for middle-income families making a household income less than $250K per year (it has been modified to $400k starting from January 2013). The push for this combined package of spending and partial tax cut was also criticized by several opponents in politics, academia, and businesses on the ground that the spending was too large under government financing to balance the growing budget deficit and national debt that might threaten future economic stability of the country.

4) A) What possible macroeconomic arguments might President Obama use to defend his $862 billion fiscal stimulus package as a part of his economic recovery plans? 5 pts.

B) What were the macroeconomic arguments the critics might have expressed in their opposition to stimulus package as a bad economic policy, and not just for the US, but also for the world economy? Do they sound to have a trickle down adverse effect in the current or future financial stability in the US and the World economy, say later in 2013 and beyond? Do you think this issue is also related to the current political rhetoric between the GOP and Democrats on raising the tax rates for the wealthy making over $250K annually and leave the Bush Tax cut for the middle class (expired on Dec 31, 2012, with modification of extending the tax cut up to $400K per household)? With the new fiscal bill of President Obama passed by the US Congress on Jan 2nd of 2013, how would it affect the economy in 2013 and beyond?                                                           5 pts.

C) What would happen to the growth rate of the money supply if foreigners lost confidence in the US dollar as a result of current uncertainty over the crisis of the fiscal cliff in the US economy while the Fed was trying nonetheless to maintain its current historic low federal funds rate target? Explain briefly.                                    5 pts.

Hint: Please keep in mind that the question asked whether money supply growth rate will increase or not (by the Fed) and why so.

d) Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD (C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the textbook) and equation, critically and briefly illustrate the short run and long run economic impact (negative effect on RGDP growth, employment, and other variables) of Recent

Explanation / Answer

Economist like Krugman sees that the economy was deeply gone into recession. The economy was at risk to have the Japan's syndrome called liquidity trap which would be very hard to get out.Based on the Keynesian model, it should not use the austerity program like in Europe,but government spending. He sees that the package is still too little.There is nothing to worry about the budget deficit, but the life of American citizens who lost jobs.The budget deficit will cure itself when the economy picks up.That is a real argument.

A)

The argument is basically Keynesian. We're in a liquidity trap that can only be fixed with huge budget deficits.

B)

Because you spend it now but pay for it later. The pay for it later part is what concerns people. Unfortunately, the US can tax not only it's citizens but the entire world. Inflation is a form of taxation (see "seigniorage") and US inflation will necessarily cause world inflation.

The stimulus package has not been financed by government borrowing from the public, but the FED called QE1 and QE2. As the domestic banking system was not in the position to give more loans due to high risk,the new money went to find new niche in foreign countries,especially in Asia. That caused most of currencies in the region to appreciate,except the Yuan which pegged to the US dollar. The situation is terminated when QE2 has come to an end with the inflation of 3.7%. Apparently,QE1 and QE2 could not save the Euro zone.

C)

The Fed is forced to buy the US government's debt (since the foreigner won't). That increases the money supply. An increase in the supply of US dollars vs. the same amount of foreign currency, means there are more dollar per amount of foreign currency percent.

d)

The actual GDP is still behind the potential GDP since the unemployment rate is still high (8.7%). It is still a recessionary gap. To move the actual GDP upward to the potential GDP and reduce the unemployment rate to 5%(natural rate), it has to increase more government spending and cut taxes.The spending multiplier and tax multiplier will save the economy.

Effects of High U.S. Debt Levels

High U.S. Debt Levels Risk

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