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[answered] 1) (Part # a) Today, the size of the US economy is estimate


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1) (Part # a) Today, the size of the US economy is estimated to be about $17 trillion. By the

 

end of 2008

 

it was estimated to be about $15 trillion. Assuming that about 33 % of full employment GDP was

 

lost during the Great Recession (say about $5trillion), use the concepts of the liquidity trap and

 

the Keynesian model (cross) to show and explain why managers accumulated inventories during

 

the Great Recession. (5 points)

 

(Part # b) Refer to Question 1. In response to the Great Recession, the Federal Reserve and the

 

US Government adopted expansionary monetary and fiscal policies. For example, the US

 

government spent about $700b at some point. Evaluate the effect of the fiscal stimulus on

 

national output if the relevant multiplier and full employment output are estimated to be 1.75?

 

an average CBO estimate?and $15 trillion respectively (1 Point). Given the average CBO

 

estimate of the multiplier, what is the marginal propensity to consume (MPC)? (1 points). What

 

could have been the contribution of the fiscal stimulus?ceteris paribus?to US recessionary

 

output in the first year? (3points). Refer to Question 1 for recessionary output.

 

2) What is monetary policy? (1Point). How did the Fed try to stabilize the US economy

 

during the Great Recession? (3 Points). Notwithstanding the efforts to stimulate the

 

economy, inbuilt risk-aversion and pessimism dampened the intended effects of monetary

 

policy. Suppose the US government had given a tax cut to the tune of $700 instead of

 

spending money, what would have been the impact on recessionary output if the relevant

 

multiplier is 0.75? (2 Points). Refer to Question 1 for recessionary output. Given the size

 

of the multiplier (0.75), what is the marginal propensity to save (MPS)? (2 points)

 


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