In 2009, in the midst of the worst recession since the Great Depression, the United States Congress approved the American Recover and Reinvestment Act (ARRA). It included at the time an estimated $789 Billion stimulus bill. Marginal propensity to consume (mpc) was estimated to be 0.97 in 2009. The U.S. economy in 2009 produced $14.42 Trillion in real GDP.

Suppose in this simplified example there was no other change in taxes, and the entire amount of the stimulus bill was new government spending.

1.Calculate the government spending multiplier.

2.Since Congress approved the ARRA funding, was the U.S. facing a recessionary gap or expansionary gap?

3.Was the current rate of unemployment in 2009, below the natural rate of unemployment, above the natural rate of unemployment, or equal to the natural rate of unemployment? Why?

4.If Congress believes that the $789 Billion will close the gap, what is the size of the gap?

5.What does Congress believe is the value of full employment Real GDP (output)? Be careful, real GDP is in Trillions of dollars and the stimulus is in Billions of dollars.