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 t...