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I N T H E N E W S Just How Stimulating Are Those Checks?

I N T H E N E W SJust How Stimulating Are Those Checks?To get an idea of how much those government rebatechecks have spurred spending—and who’s benefitingfrom the buying—business school professors JonathanParker (Northwestern) and Christian Broda (Universityof Chicago) analyzed the spending of 30,000 rebatereceivinghouseholds. Using data provided by AC-Nielsen’sHomescan, whose participants scan the bar codes ontheir purchases into a database, the researchers foundthe rebates “clearly have increased household spending,”Parker says. Lower-income households boostedconsumption most—spending 6% more, comparedwith a 3.5% rise across all households.—Tara KalwarskiSource: BusinessWeek, September 8, 2008, p. 14.Analysis: The 2008 tax cuts were a form of fiscal stimulus that boosted consumption (personalspending), increased real GDP growth, and reduced unemployment.(a) By how much does consumer saving increase initially?(b) How large is the initial spending injection?2. Suppose the consumption function isC 5 $500 billion 1 0.9Yand the government wants to stimulate the economy. By how much will aggregate demand atcurrent prices shift initially (before multiplier effects) with(a) A $50 billion increase in government purchases?(b) A $50 billion tax cut?(c) A $50 billion increase in income transfers?What will the cumulative AD shift be for(d) The increased G?(e) The tax cut?( f ) The increased transfers?3. Suppose the government decides to increase taxes by $30 billion in order to increase SocialSecurity benefits by the same amount. How will this combined tax-transfer policy affect aggregatedemand at current prices?5. If the AD shortfall is $800 billion and the MPC is 0.8,(a) How large is the desired fiscal stimulus?(b) How large an income tax cut is needed?(c) Alternatively, how much more government spending would achieve the target?6. If the AD excess is $400 billion and the MPC is 0.9,(a) How much fiscal restraint is desired?(b) By how much do income taxes have to be increased to get that restraint?7. (a) According to the News on page 233, how much more did the average household spend onappliances, electronics, and furniture when it received the 2008 tax rebate?91$(b) If the MPC was 0.9, how much would cumulative spending increase as a result?

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