In 2009 the United States Government Spent $950 Billion in a Fiscal Stimulus Package Essays

In 2009 the United States Government Spent $950 Billion in a Fiscal Stimulus Package Essays In 2009 the United States Government Spent $950 Billion in a Fiscal Stimulus Package Essay In 2009 the United States Government Spent $950 Billion in a Fiscal Stimulus Package Essay In 2009 the United States Government spent $950 billion in a fiscal stimulus package. Discuss the extent to which this stimulus will affect output, unemployment and inflation. (18 marks) Before we look into how the United States Government investment in a fiscal stimulus package effects output, employment and inflation, we must ensure we understand what is meant by a fiscal stimulus or policy. It is defined by economists as a package of economic measures put together by the government to stimulate a struggling economy. The objective of a stimulus package is to revive the economy and prevent or reverse a recession by boosting employment, spending and output. [INSERT DIAGRAM HERE] With large investment being placed into a new fiscal stimulus package, the resulting injection will significantly effect the level of economic output. However, the significance of this change depends greatly upon the positioning of the macro-economic equilibrium before the stimulus. This stimulus package qualifies itself to be a form of fiscal policy, and therefore a form government spending, which is a component of aggregate demand. Therefore due to this large monetary injection from behalf of the AD curve will undergo a rightward shift. That said, as demonstrated on the graph above that the economy is far from reaching full capacity utilization, therefore a shift right in the AD curve has very a slight effect on price level however, a significant change in real GDP. This is due to the fact the economy is still operating on the elastic side of the curve. Moreover, there is the possibility of a rightward shift in aggregate supply as a result of the stimulus injection. This therefore as a consequence will encourage firms to meet the demands of the surge in the aggregate demand curve through the purchase of capital goods in aid of production, new forms of technology and further investment in order to increase capacity utilization. Thus increasing economic output. [INSERT DIAGRAM HERE] As represented in the graph above, a rightward shift in the aggregate supply curve results in a decrease in the price level due to the increase in the given output level therefore, resulting in a further increase in real GDP. However, the degree of this shift depends greatly on the marginal propensity to consume (MPC) and the level of confidence of firms going forward. If there is a lack of confidence and low overall MPC on behalf of firms there will either cease to be a shift in aggregate supply or there will be a very small shift. The stimulus package will also have a direct effect on the level of employment within the economy. However, the effect depends greatly on the confidence of firms and other economic organisations. If confident firms will want to increase their overall output and therefore as a result will take on more employees to enhance the level of total output which can be reached (capacity cultivation). This will consequently decrease the level of unemployment within the economy, and mean there will be less government expenditure aimed toward benefits or job seekers allowance. However in retrospect, if firms lack confidence and have a low overall MPC to prevent them investing in ways to increase their overall output, such as capital goods and increasing the labour force unemployment will see no decrease or will only increase marginally. INSERT DIAGRAM HERE] The rate of inflation within the economy will be bound to see a change as a result of the stimulus injection. If we continue to assume that the macro-economic equilibrium is situated by the elastic part of the aggregate supply curve, therefore a rightward shift in aggregate demand will have a very minimal effect on the price level and inflation, however great effect on the real GDP figure. In addition there might even be possibility of a decrease in the price level if the aggregate supply curve shifts right whilst firms simultaneously invest in capital goods and labour force growth. However, this theory depends strongly on the fact that firms have high confidence and MPC. If the macro-economic equilibrium was positioned or was reaching the inelastic segment of the aggregate supply curve, there would be a substantial increase in the overall price level however no or minute change in real GDP. This would result in a negative impact on the economy as the level of output would receive no change however, the price level would. This would therefore mean the population would have less real disposable income, or RDI, available to them this decreasing the MPC and consumer confidence as less can be consumed. The impact on consumers would mean that firms would have little confidence and therefore, wouldn’t invest in means of increasing their output potential. This meaning the aggregate supply curve would see no change and inflation would as a result increase significantly. The multiplier effect also possess great significance in regards to the overall economic impact the stimulus will have on the United States economy. However, before analysing the importance of the multiplier effect, we must be sure we have a thorough understanding of what it means. It is defined by economists as, the process by which any change in a component of AD results in a greater final change in real GDP. In the case of the huge injection from the stimulus package it is more than likely there will be a multiplier response. The injection will cause a surge in economic activity causing a shift in aggregate demand as a result. However, this depends on the number of leakages stemming from, savings, imports and taxes, and the overall size of these leakages. If confidence is high amongst firms and consumers is high it is therefore unlikely that savings will take place as there will be a high overall MPC, the proportion of total RDI that they spend on goods, services and capital aids to production. . However, if there is an overall low level of confidence there will be an increase in the total amount of leakages from the circular flow as there are lots of savings taking place. As a result, this will decrease the multiplier effect. That said it is also worth noting that there may be an increase in imported goods and services as well as a change in taxation which would cause further leakages within the circular flow, thus hindering the impact of the multiplier effect. Therefore in conclusion, it is clear that a fiscal policy injection of this magnitude will create a definite macro-economic change especially in areas concerning output, unemployment and inflation. However, it is only certain that this change will be positive if the macro-economic equilibrium is situated on the lower elastic segment of the aggregate supply curve. If this is not the case the change could well cause economic issues (shortfall) such as high inflation. In addition, the increase in output of the economy depends upon the confidence of firms and consumers and an overall high MPC must be reached in order to ensure the best effect on the economy. This will encourage the purchase of capital goods and an increase in the size of the labour force in order to increase output. However, we must also take into consideration the role of the multiplier effect and as to how an increase or decrease in the volume and level of leakages will impact the economy and the overall effect of the stimulus package.