Fiscal Stimulus Needed to Fight Recessions

1. This question is based on the article, “Fiscal Stimulus Needed to Fight Recessions,” by Chad Stone, published on April 16, 2020, by the Center on Budget and Policy Priorities. The article discusses how the various tools of macroeconomic policy have evolved over the past several decades and how they can be used to mitigate the effects of adverse macroeconomic shocks. While the entire article is worth reading and highly recommended, this question focuses on the following three sections: “Fiscal Policy Played a Prominent Role in the Great Recession”, “Success of the Fiscal Response to the Great Recession”, and “Policymakers Must Use Fiscal Stimulus in a Recession”.

• The section “Fiscal Policy Played a Prominent Role in the Great Recession” describes the factors that triggered and deepened the Great Recession. According to the article, what were the factors that triggered the Great Recession? [4] What were the factors that deepened the Great Recession? [4]

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• According to the section “Fiscal Policy Played a Prominent Role in the Great Recession”, what monetary policy measures were adopted by the Fed to fight the recession? [6] Which of those measures were unconventional monetary policies? [2]

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• According to the section “Fiscal Policy Played a Prominent Role in the Great Recession”, what fiscal policy measures were adopted by the federal government to fight the recession? Specifically, what was the total size of the fiscal policy package and what public law promulgated these measures? What were the four groups of such measures as categorized by the Congressional Budget Office (CBO)? [8]

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• According to the Box, “How ARRA Increased Output and Employment”, what were CBO’s estimates of the multipliers (“bang-for-the-buck”) of the major components of fiscal stimulus adopted during the Great Recession? [10]

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• In part (d), what may be the reason why the multiplier of federal government purchases of goods and services was much larger than the multiplier of tax cuts for lower- and middle-income people? Please utilize concepts covered in Module 5 of the course to analyze and explain this phenomenon. [6]

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• In part (d), what may be the reason why the multiplier of unemployment insurance payments was much larger than the multiplier of the corporate tax cuts? Please utilize concepts covered in Module 5 of the course to analyze and explain this phenomenon. [6]

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• The section titled “Policymakers Must Use Fiscal Stimulus in a Recession” points to empirical evidence indicating that in recessions discretionary fiscal policy can be effective at stimulating aggregate demand if the interest rate is low and the central bank does not counter the fiscal expansion by monetary tightening. Why is fiscal policy more effective in such a situation compared to other conditions? Please use the IS-LM framework to explain your answer. [7]

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• The section titled “Policymakers Must Use Fiscal Stimulus in a Recession” claims that “recovery from the Great Recession was slowed by a premature turn toward budget austerity beginning in 2010”. According to the article, what factors constrained the continuation of fiscal expansion after 2010? Were the arguments in favor of austerity at the time based on sound empirical evidence? [7]

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