Question

I chose the 10 year period between 200 to 2010

Referring to the 10-year historical period that you chose for your final project, discuss an example of a change in autonomous spending. Research a government policy implemented during that time and discuss the multiplier effect it had on the economy.

Answer 1

Changes in government policy against 2008 recession and its multiplier effect :-

The crisis of 2008 so financial disruptions spread from financial markets to the economy at large .The crisis in the housing market due to decrease in housing prices reduce the wealth of many households because of which they become for reducing their consumption .Second the disruptions in the financial system made it difficult for firms to obtain financing leading to lesser investment in the market.

The Obama administration took office in January 2009 and formulated a stimulus package to deal with the looming recession. The American recovery and reinvestment act of 2009 was signed into law on February 17 2009 which contained a package of increasing government autonomous spending of approximately dollar 800 billion along with tax cuts .From November 2009 Federal government it started purchasing goods and services amounting to dollar 90 Billion over a 10 year period of time transfer payments to households was said to increase by about dollar hundred billion and transfer to state and local governments what to increase by nearly Dollar 260 billion.

Multiplier effect with changes in government autonomous spending :-

The aggregate expenditure model includes the fact that Gross Domestic Product measures both total spending and Total production when planned actual spending are in balance then real GDP = planned spending = autonomous spending + marginal propensity to spend * real GDP. This framework tells that an increase in autonomous spending leads to increase in real GDP with a multiplier effect . This can be magnified to the circular flow of income as spending increases income also increases leading to further increase in consumption this is the multiplier process which can be e Expressed as 1/(1-MPS) where MPS is the marginal propensity to spend.