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 (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)

(b)  Refer to part (a). 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 4 for recessionary output.

 


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