The Washington Post published, on 2/4/2021, an editorial by Larry Summers, a professor of Economics at Harvard University. Consider the following excerpt.

President Biden's $1.9 trillion covid-19 relief plan, added to the stimulus measure Congress passed in December with the incoming administration's strong support, would represent the boldest act of macroeconomic stabilization policy in U.S. history. Its ambition, its rejection of austerity orthodoxy and its commitment to reducing economic inequality are all admirable. It is imperative that safety-net measures for those suffering and investments in vaccination and testing be undertaken rapidly after the indefensible delays of the last months of the Trump administration.

Yet bold measures need to be accompanied by careful consideration of risks and how they can be mitigated. While the arguments for providing relief to those hurt by the economic fallout of the pandemic, investing in controlling the virus and supporting consumer demand are compelling, much of the policy discussion has not fully reckoned with the magnitude of what is being debated.

I agree with the general consensus of progressive economists that it would have been much better if the Obama administration had been able to legislate a much larger fiscal stimulus in early 2009, in response to the Great Recession. Yet a comparison of the 2009 stimulus and what is now being proposed is instructive. In 2009, the gap between actual and estimated potential output was about $80 billion a month and increasing. The 2009 stimulus measures provided an incremental $30 billion to $40 billion a month during 2009 - an amount equal to about half the output shortfall.

In contrast, recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package - but without any new stimulus - the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month. That is at least three times the size of the output shortfall. In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large.

a.Given what we have learned in class, and other things equal, what would be a likely consequence of the currently proposed fiscal stimulus on inflation? Please highlight one:

Inflation increases Inflation decreases

b.Please explain in up to three lines.

c.Given its mandate, what is the more likely response of the Federal Reserve to the developments in point a) above? Please highlight one:

The FED increases the ratesThe FED decreases the rates

d.Please explain in up to three lines.

e.What is the likely consequence of the developments in part c) on the US trade deficit in the short run? Please highlight one:

The trade deficit growsThe trade deficit shrinks

f.Please explain in up to three lines