In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862 (It was originally at $787 billion) through the Congress and later passed by the House and the Senate, whose centerpiece was spending most of this stimulus funds in repairing and building infrastructure in transportation, healthcare, science and technology, and education. Pres. Obama also urged to make a modest tax cut for middleincome families making a household income less than $250K per year (it has been modified to $400k starting from January 2013). The push for this combined package of spending and partial tax cut was also criticized by several opponents in politics, academia, and businesses on the ground that the spending was too large under government financing to balance the growing budget deficit and national debt that might threaten future economic stability of the country. A) What possible macroeconomic arguments might President Obama use to defend his $862 billion fiscal stimulus package as a part of his economic recovery plans? B) What were the macroeconomic arguments the critics might have expressed in their opposition to stimulus package as a bad economic policy, and not just for the US, but also for the world economy? Do they sound to have a trickle down adverse effect in the current or future financial stability in the US and the World economy, say later in 2013 and beyond? Do you think this issue is also related to the current political rhetoric between the GOP and Democrats on raising the tax rates for the wealthy making over $250K annually and leave the Bush Tax cut for the middle class (expired on Dec 31, 2012, with modification of extending the tax cut up to $400K per household)? With the new fiscal bill of President Obama passed by the US Congress on Jan 2nd of 2013, how would it affect the economy in the next two years starting from Jan 2013? Note: President Obama is expected to propose further stimulus package in his 2015 State of the Union Address of Jan 20, 2015 on the basis of the same principle for boosting the middle class economy. C) Recent data shows a sudden decline of RGDP growth rate in China after continuous robust economic growth for more than a quarter of century. In response to this early sign of recession, on April 19, 2015 the central bank of China has reduced its reserve requirement ratio by another 1% that it has started reducing since Nov 30, 2011. This is the second time since Feb 4, 2015 that the Central Bank of China reduced its RRR this year. In reaction to that biggest one time reduction of RRR was a sharp spike in stock market prices worldwide within hours. What would happen to the growth rate of the money supply in China if foreigners lost confidence in the Chinese Economy as a result of current uncertainty over the declining rate of economic growth and aggressive reduction of RRR by its Central Bank? Explain briefly. D)Using the Keynesian Cross model diagram (The diagram with 45 degree line by sp.

1. In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862
(It was originally at $787 billion) through the Congress and later passed by the House and the
Senate, whose centerpiece was spending most of this stimulus funds in repairing and building
infrastructure in transportation, healthcare, science and technology, and education. Pres. Obama
also urged to make a modest tax cut for middleincome families making a household income less
than $250K per year (it has been modified to $400k starting from January 2013). The push for
this combined package of spending and partial tax cut was also criticized by several opponents in
politics, academia, and businesses on the ground that the spending was too large under
government financing to balance the growing budget deficit and national debt that might threaten
future economic stability of the country.
A) What possible macroeconomic arguments might President Obama use to defend his $862
billion fiscal stimulus package as a part of his economic recovery plans?
B) What were the macroeconomic arguments the critics might have expressed in their opposition
to stimulus package as a bad economic policy, and not just for the US, but also for the world
economy? Do they sound to have a trickle down adverse effect in the current or future financial
stability in the US and the World economy, say later in 2013 and beyond? Do you think this
issue is also related to the current political rhetoric between the GOP and Democrats on raising
the tax rates for the wealthy making over $250K annually and leave the Bush Tax cut for the
middle class (expired on Dec 31, 2012, with modification of extending the tax cut up to $400K
per household)? With the new fiscal bill of President Obama passed by the US Congress on Jan
2nd of 2013, how would it affect the economy in the next two years starting from Jan 2013?
Note: President Obama is expected to propose further stimulus package in his 2015 State of the
Union Address of Jan 20, 2015 on the basis of the same principle for boosting the middle class
economy.
C) Recent data shows a sudden decline of RGDP growth rate in China after continuous robust
economic growth for more than a quarter of century. In response to this early sign of recession,
on April 19, 2015 the central bank of China has reduced its reserve requirement ratio by another
1% that it has started reducing since Nov 30, 2011. This is the second time since Feb 4, 2015 that
the Central Bank of China reduced its RRR this year. In reaction to that biggest one time
reduction of RRR was a sharp spike in stock market prices worldwide within hours. What would
happen to the growth rate of the money supply in China if foreigners lost confidence in the
Chinese Economy as a result of current uncertainty over the declining rate of economic growth
and aggressive reduction of RRR by its Central Bank? Explain briefly.
D)Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD
(C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the

2. textbook) and equation, critically and briefly illustrate the short run and long run economic
impact (negative effect on RGDP growth, employment, and other variables) of Recent
Solution
A. With a presidential election fast approaching, policymakers have come to a quick consensus
regarding the risks of recession and the need for fiscal stimulus.The economy is indeed
struggling. The job market has stalled, Christmas sales were soft, and industrial production has
gone flat.The threat of recession is evident in the recent substantial increase in
unemployment. Unemployment is typically the catalyst for a recession spiral because increased
joblessness undermines consumer confidence and thus consumer spending. Businesses respond
to flagging sales by cutting back investment and payrolls, and unemployment rises further. A
negative, self-reinforcing cycle begins.The need for fiscal stimulus is reinforced by the
possibility that monetary policy has become less effective in stimulating growth. This is big
enough to provide a meaningful economic boost.The goal of a fiscal stimulus plan is to
maximize the nearterm boost to economic growth without weakening the economy