In March 2020 Congress passed the CARES Act, which was a $2 trillion dollar bill that...

 

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In March 2020 Congress passed the CARES Act, which was a $2 trillion dollar bill that included transfer payments to households. Suppose we represent this through I in our IS sub-model. Remember transfer payments show up in I because I represents taxes fewer transfers. In other words, T = taxes - transfers. a) Draw the IS sub-model to show the impact of an increase in transfers (funded through borrowing) on equilibrium output. What was the desired result or purpose of the CARES Act? Describe the diagram in words. b) What might prevent people from behaving exactly as described in the model? Why might people's responses in this recession be different from their responses in past recessions? (answers will vary) c) Suppose rather than borrowing the government pays for the increase in transfer payments with an equivalent increase in taxes. How does the increase in transfer payments affect equilibrium output in this case? d) Suppose the population is made up of an equal number of two types of people with the same income but different marginal propensities to consume: those with a high propensity to consume and those with a low propensity to consume. Suppose the transfer policy increases taxes on those with a low propensity to consume and pays for transfers to people with a high propensity to consume. How would this policy affect equilibrium output? e) How do you think propensity to consume might vary across individuals according to income? f) Given your answer in part e), do you think tax cuts will be more effective at stimulating output when they are directed toward high-income or toward low-income taxpayers? In March 2020 Congress passed the CARES Act, which was a $2 trillion dollar bill that included transfer payments to households. Suppose we represent this through I in our IS sub-model. Remember transfer payments show up in I because I represents taxes fewer transfers. In other words, T = taxes - transfers. a) Draw the IS sub-model to show the impact of an increase in transfers (funded through borrowing) on equilibrium output. What was the desired result or purpose of the CARES Act? Describe the diagram in words. b) What might prevent people from behaving exactly as described in the model? Why might people's responses in this recession be different from their responses in past recessions? (answers will vary) c) Suppose rather than borrowing the government pays for the increase in transfer payments with an equivalent increase in taxes. How does the increase in transfer payments affect equilibrium output in this case? d) Suppose the population is made up of an equal number of two types of people with the same income but different marginal propensities to consume: those with a high propensity to consume and those with a low propensity to consume. Suppose the transfer policy increases taxes on those with a low propensity to consume and pays for transfers to people with a high propensity to consume. How would this policy affect equilibrium output? e) How do you think propensity to consume might vary across individuals according to income? f) Given your answer in part e), do you think tax cuts will be more effective at stimulating output when they are directed toward high-income or toward low-income taxpayers?

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A The desired result or purpose of the CARES Act was to stimulate economic activity by providing transfer payments to households funded through borrowing The diagram depicted below shows how an increa... View the full answer