The ‘spending multiplier’ effect

1. An important concept to explain the Keynesian model is the ‘spending multiplier’ effect. According to Keynes, an initial spending creates income in the economy and this new income leads to more spending and more income. As a result of this chain reaction, aggregate spending will increase more than the initial spending. To understand this concept better, please read Humorist Art Buchwald’s famous Multiplier example in the materials and construct your own example to explain the multiplier process. Your starting point can be a change (an increase or a decrease) in consumption expenditure, investment expenditure, government expenditure, or a change in exports. Be creative and come up with a fun scenario as in the Multiplier example by Art Buchwald. How would a change in C, I, G or X affect the economy? Would the effect on the economy be more, equal to or less than the initial change in spending?


2. Research the fiscal policy implemented in the US during the Great Recession.

Explain the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009.
Discuss if these programs are Keynesian or Classical.
Please include how increases in aggregate demand through government expenditures and tax cuts (through the multiplier effect) increase GDP in your answer.
Here are a few resources for you:

(feel free to use other credible sources and cite your references in your discussion post)

Bush Signs Stimulus Bill (ESA of 2008)

Obama’s Stimulus Package ARRA 2009

The US Economic Stimulus Plan 2009 (Links to an external site.)

3. Why do you think so many city governments and states seem to “bend over backwards” to get new businesses to locate in their local economies? Indeed, many cities, counties and states offer tax breaks (e.g. promises not to impose local property taxes for up to 15 years), and some provide land free to businesses who choose to locate in their areas. What concept introduced in this week help explain this behavior? Can you give an example from your local economy?

Here is an example from Amazon’s recent search for it’s second HQ and the response from the cities all around the US (Links to an external site.)




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