A) What were the macroeconomic arguments the critics might have expressed in the

Question

A) 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 2ndof 2013, how would it affect the economy in the next two years starting from Jan 2013?

B)

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 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

Explanation / Answer

A)

Because you spend it now but pay for it later. The pay for it later part is what concerns people. Unfortunately, the US can tax not only it's citizens but the entire world. Inflation is a form of taxation (see "seigniorage") and US inflation will necessarily cause world inflation.

The stimulus package has not been financed by government borrowing from the public, but the FED called QE1 and QE2. As the domestic banking system was not in the position to give more loans due to high risk,the new money went to find new niche in foreign countries,especially in Asia. That caused most of currencies in the region to appreciate,except the Yuan which pegged to the US dollar. The situation is terminated when QE2 has come to an end with the inflation of 3.7%. Apparently,QE1 and QE2 could not save the Euro zone.

The argument is basically Keynesian. We're in a liquidity trap that can only be fixed with huge budget deficits.

B)

The actual GDP is still behind the potential GDP since the unemployment rate is still high (8.7%). It is still a recessionary gap. To move the actual GDP upward to the potential GDP and reduce the unemployment rate to 5%(natural rate), it has to increase more government spending and cut taxes.The spending multiplier and tax multiplier will save the economy.

Effects of High U.S. Debt Levels

High U.S. Debt Levels Risk

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