1) (Part # a) Today, the size of the US economy is estimated to be about $17 trillion. By theend of 2008it was estimated to be about $15 trillion. Assuming that about 33 % of full employment GDP waslost during the Great Recession (say about $5trillion), use the concepts of the liquidity trap andthe Keynesian model (cross) to show and explain why managers accumulated inventories duringthe Great Recession. (5 points)(Part # b) Refer to Question 1. In response to the Great Recession, the Federal Reserve and theUS Government adopted expansionary monetary and fiscal policies. For example, the USgovernment spent about $700b at some point. Evaluate the effect of the fiscal stimulus onnational output if the relevant multiplier and full employment output are estimated to be 1.75âan average CBO estimateâand $15 trillion respectively (1 Point). Given the average CBOestimate of the multiplier, what is the marginal propensity to consume (MPC)? (1 points). Whatcould have been the contribution of the fiscal stimulusâceteris paribusâto US recessionaryoutput in the first year? (3points). Refer to Question 1 for recessionary output.2) What is monetary policy? (1Point). How did the Fed try to stabilize the US economyduring the Great Recession? (3 Points). Notwithstanding the efforts to stimulate theeconomy, inbuilt risk-aversion and pessimism dampened the intended effects of monetarypolicy. Suppose the US government had given a tax cut to the tune of $700 instead ofspending money, what would have been the impact on recessionary output if the relevantmultiplier is 0.75? (2 Points). Refer to Question 1 for recessionary output. Given the sizeof the multiplier (0.75), what is the marginal propensity to save (MPS)? (2 points)
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