Economists in the Obama administration estimated that the government stimulus pa

Question

Economists in the Obama administration estimated that the government stimulus package in 2011 has a multiplier value of 1.57, while other economists have estimated the multiplier to be only 0.61.

A. Briefly explain how the government spending multiplier can have a value less than 1.

B. Why does an estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal policy?

C. Which types of government spending have high multiplier effects and which types have low multiplier effects?

Explanation / Answer

General dicussion : -

.......Poorly timed fiscal policy can do more harm than good. Getting the timing right with fiscal policy can be difficult because obtaining approval from Congress for a new fiscal policy can be a very long process and because it can take months for an increase in authorized spending to actually take place. Because an increase in government purchases may lead to a higher interest rate, it may result in a decline in consumption, investment, and net exports. A decline in private expenditures as a result of an increase in government purchases is called crowding out. Crowding out may cause an expansionary fiscal policy to fail to meet its goal of keeping the economy at potential GDP.

Solution to the questions : -

A)If the package of spending held out as a stimulus includes a lot of money going to things that investors would have financed in the absence of the stimulus, some economists feel the crowding out of the private investment will generate lower than 1 multipliers.

B). If the goal of the policy is to expand economic activity, the higher the multiplier, the better

The larger the multiplier, the greater the effects of an expansionary fiscal policy

C) Projects that would not have happened without the government, such as building bridges, canals, dams or other high cost projects with multiple beneficiaries are hard to privately finance. These will employ people in the short run and have immediate benefit if unemployment is high in the same sector as the jobs created.

*** Low multiplier projects would be things like commissioning low income housing during times of prosperity. The private sector would have built new housing which would have drawn in customers leaving older housing to migrate to low income use.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.