Part 1 - Check Your Understanding- Use the information in the paragraph to answer the questions. Assume that policymakers believed that the marginal propensity to consume (MPC) was 0.9.

Following the announcement in December 2008 that the U.S. economy had been in a recession since December 2007, Congress and President Obama passed theAmerican Recovery and Reinvestment Act(ARRA) into law in February 2009. The ARRA cut taxes by $288 billion, increased government spending by $275 billion, and increased transfer payments by $224 billion. Although not fully implemented, the majority of the government spending would take place in 2010 and 2011.

1. Was the ARRA an example of discretionary fiscal policy or nondiscretionary fiscal policy? Explain.
2. Fiscal policy is sometimes criticized for having an implementation gap. Give evidence of an implementation gap from the information in the paragraph.
3. Calculate the maximum increase in GDP that could result from the tax cut. Show your work.
4. Calculate the maximum increase in GDP that could result from the increase in government spending. Show your work.

5. Calculate the maximum increase in GDP that could result from the increase in government transfers. Show your work.

6. Based on your calculations, what is the maximum change in spending from the AARA? Show your work.

7. Predict how the ARRA affected the national debt. Explain your reasoning.