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About That Stimulus Package . . .
In early 2008, there was broad bipartisan ceived $300. In effect, the plan was a combina-
agreement that the U.S. economy needed a fis- tion of tax cuts for most Americans and transfer
cal stimulus. There was, however, sharp parti- payments to Americans with low incomes.
san disagreement about what form that How well designed was the stimulus plan?
stimulus should take. The eventual bill was a Many economists believed that only a fraction John Moore/Getty Images
compromise that left both sides unhappy and of the rebate checks would actually be spent, so
arguably made the stimulus less effective than that the eventual multiplier would be fairly low.
it could have been. White House economists appeared to agree:
Initially, there was little support for an in- they estimated that the stimulus would raise doldrums, there was widespread agreement
crease in government purchases of goods and employment by half a million jobs above what it that the plan’s results had been disappointing.
services—that is, neither party wanted to build would have been otherwise, the same number And by late 2008, with the economy shrinking
bridges and roads to stimulate the economy. offered by independent economists who be- further, policy makers were working on a new,
Both parties believed that the economy needed lieved that the multiplier on the plan would be much larger stimulus plan that relied more
a quick boost, and ramping up spending would around 0.75. (Remember, the multiplier on heavily on government purchases. The Ameri-
take too long. But there was a fierce debate changes in taxes or transfers can be less than can Recovery and Reinvestment Act was passed
over whether the stimulus should take the form 1.) Some economists were critical, arguing that in February 2009. The bill called for $787 billion
of a tax cut, which would deliver its biggest Congress should have insisted on a plan that in expenditures on stimulus in three areas: help
benefits to those who paid the most taxes, or an yielded more “bang for the buck.” for the unemployed and those receiving Medi-
increase in transfer payments targeted at Amer- Both Democratic and Republican economists caid and food stamps; investments in infra-
icans most in economic distress. working for Congress defended the plan, argu- structure, energy, and health care; and tax cuts
The eventual compromise gave most taxpayers ing that the perfect is the enemy of the good— for families and small businesses.
a flat $600 rebate, $1,200 for married couples. that it was the best that could be negotiated on Despite controversies over specifics, the gen-
Very high -income taxpayers were not entitled to a short notice and was likely to be of real help in eral consensus about active stabilization policy
rebate; low earners who didn’t make enough to fighting the economy’s weakness. But by late is apparent: when at first you don’t succeed, try,
pay income taxes, but did pay other taxes, re- summer 2008, with the U.S. economy still in the try again.

Module 21 AP Review
Solutions appear at the back of the book.

Check Your Understanding
1. Explain why a $500 million increase in government purchases 3. The country of Boldovia has no unemployment insurance
of goods and services will generate a larger rise in real GDP than benefits and a tax system using only lump-sum taxes. The
a $500 million increase in government transfers. neighboring country of Moldovia has generous unemployment
benefits and a tax system in which residents must pay a
2. Explain why a $500 million reduction in government purchases
percentage of their income. Which country will experience
of goods and services will generate a larger fall in real GDP than
greater variation in real GDP in response to demand shocks,
a $500 million tax increase.
positive and negative? Explain.

module 21 Fiscal Policy and the Multiplier 213