Suppose the Stimulus package (The American Recovery and Reinvestment ACT of 2009

Question

Suppose the Stimulus package (The American Recovery and Reinvestment ACT of 2009) for $862 (originally it amount was approved for $787 billion and subsequently increased to $862 billion) was allocated for spending in all 3 components of the AE model of Keynesian Macro model (RGDP = C+I+G); where they spent the bulk of it in G (government expenses for infrastructure), some of it in Tax rebates (-T), and the rest of it in the form of subsidies/credit in Private business investment (I). If the actual increase in RGDP was $2 trillion ($2,000 bullion), assuming other things stay the same, estimate the actual or real world effective multiplier. Show your work.

Explanation / Answer

The stumulus was of the size of $862 billion. The Real GDP increased by $2000 billion.

Multiplier = Rise in RGDP / size of the stimulus
= $2,000 billion / $862 billion
= 2.32.

Therefore, the real world effective multiplier is 2.32. That is, for every dollar of stimulus spent on the economy, the RGDP rose by $2.32.

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