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In the winter of 2020/2021, Congress debated, and voted on, various new stimulus proposals. Assume policymakers' goal was to make up for the decline in
In the winter of 2020/2021, Congress debated, and voted on, various new stimulus proposals. Assume policymakers' goal was to make up for the decline in economic activity in 2020 and restore GDP to where it would have been in the absence of the pandemic. Because real GDP (in 2012 dollars) went from $19.036 trillion in 2019 to $18.509 trillion in 2020, this means restoring GDP to the ($19.036 1.0229 =) $19.472 trillion it would have reached had it continued growing at the same rate as in 2019. Given a GDP deflator of 1.13769 in 2020, this means a nominal GDP (in 2020 dollars) of ($19.472 1.13769 =) $22.153 trillion (in 2020 dollars), which is $1.093 trillion higher than the actual 2020 nominal GDP of $21.060 trillion (in 2020 dollars).the consensus estimate for the government-expenditures multiplier is 1.5. 1 As you know, b) How large a fiscal stimulus would have been necessary to restore the economy to where it would have been in the absence of the pandemic, if such a stimulus were based exclusively on a government spending increase (not offset by a commensurate tax increase)? Give your answer both in dollars and as a percentage of GDP
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