Business

1. In the second half of 2020, economists predicted that in the absence of a new fiscal stimulus package, concerns about possibility of infection and loss of income due to the COVID-19 pandemic would reduce household spending on good and services produced in the US by about $235 billion in 2021. At the end of 2020, the US government implemented a $120 billion cash transfer program by delivering $600 tax-free stimulus checks to 200 million Americans. For the purposes of this exercise, please ignore the other components of the actual stimulus package that was signed into law at the end of 2020. Assume that the stimulus package has no impact on other government expenditure, investment, or exports of the US economy. Also, assume that households start to spend their stimulus transfers in 2021 and for every dollar of increase in their disposable income (earnings net of taxes), they spend $0.50 on goods and services and save the rest. Finally, assume that for every dollar of spending, the US imports $0.20 worth of goods and services and the rest, $0.80, is spent on U.S. products.
(a) What will be the direct impact of the stimulus transfer on the total private spending in 2021? Please show/explain the logic of your calculations, in addition to the final answer. [4]
(a) What will be the direct impact of the stimulus transfer on U.S. imports? Please show/explain the logic of your calculations, in addition to the final answer. [4]
(a) What will be the direct impact of the stimulus transfer on the total private spending on U.S. products? Please show/explain the logic of your calculations, in addition to the final answer. [4]
(d)The increased amount of spending on U.S. products that you calculated in part (c) will be earned by American households, which will induce a second-round of increase in consumption expenditure. If the average tax rate is 20 percent, what will be the increase in household disposable income (i.e., after-tax income) in that second round? Please show/explain the logic of your calculations, in addition to the final answer.

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