## [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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