The economy is in a recessionary gap.The Federal government has implemented aid packages that, among other things, substantially increase transfer payments.These transfer payments will aid families whose jobs are affected by the virus.The payments are a type of expansionary fiscal policy.

a. Using the terms of the AD-AS model, describe the impact on the economy of a substantial increase in transfer payments.

b.In this class, we have discussed two negative aspects of expansionary fiscal policy: lags and crowding out.Discuss each of these negative aspects as they apply to the current aid payments.