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.
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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.
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