See the slides and the FED reading: https://www.frbsf.org/economic-research/publications/economic-letter/2020/may/covid-19-fiscal-multiplier-lessons-from-great-recession/(Links to an external site.)

Please answer the following questions:

(1) When the savings rate is 1/3, what is the fiscal multiplier (you can ignore taxes)? What is the multiplier when the savings rate is 1/5? Explain what this means for an increase in government spending (G).

(2) In general, how does an increase in savings affect the effectiveness of fiscal policy and the recovery?

(3) What are the opportunities and threats?

Hint: The FRB San Francisco article above is helpful for parts (ii) and (iii).