Early in 2008, economists predicted that in the absence of any change in fiscal and monetary policies, the declines in house and other asset prices would reduce private consumer spending by about $230 billion in that year. The Bush administration implemented a $150 billion tax rebate to counter the drop in private spending. Assume that for every dollar of increase in their disposable income (earnings net of taxes), American households spend $0.80 more on goods and services and save the rest. (Note: each dollar of tax rebate increases disposable income by $1.) Also, assume that for every dollar of spending, the US imports $0.20 worth of goods and services and the rest, $0.80, is spent on U.S. products.

1) What was the direct impact of the 2008 tax rebate on total private spending?

2) Whatwasthe direct impact of the 2008taxrebateon totalprivatespending on U.S. products?

3) Whatwasthe direct impact of the2008 tax rebateontheprivate spending ofimported products(increase in imports)?

4) The increased amountofspendingon U.S. productsthat you calculated in part (b) hada second-round effect. Itbecameincome for the households inthe country. If the average tax rate is 25 percent, whatmust have beenthe increase in household disposable income (i.e., after-tax income) in that2ndround?

5) The increase in disposable income in the 2nd round led to additional spending. The part of this additional spending that fell on domestic products in that round generated further income for domestic firms and entailed a 3rd round of effects, causing increased disposable income, spending, imports, etc. Similarly, there were fourth, fifth, ... rounds of income and spending increase. The following table provides a method of organizing the information about these rounds, up to round 14 when the marginal increases became negligible compared to the initial stimulus.

Assume that in each round, the spending, import, and tax shares remained the same as described above. Calculate the increases in the variables listed in the last 4 columns of Table 1 for each listed round. Note: You may want to complete these calculations in spreadsheet software (such as Microsoft Excel) and transfer them back here.

Round s Initial Tax Rebate 1 150.00 2 0.00 3 0.00 4 0.00 5 0.00 6 0.00 7 0.00 8 0.00 9 0.00 10 0.00 11 0.00 12 0.00 13 0.00 14 0.00 Total 150.00 Increase in Disposable Private Income Increase in Private Spendin g Increase in Imports Increase in Total Spending on Domestic Goods and Services