The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers.

a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments.

b. Illustrate the effect on real GDP with the use of a graph depicting the income–expenditure equilibrium.

Label the vertical axis “Planned aggregate spending, AE_Planned” and the horizontal axis “Real GDP.” Draw two planned aggregate expenditure curves (AE_Planned1 and AE_Planned2) and a 45-degree line to show the effect of the autonomous policy change on the equilibrium.