Consumption and the Aggregate Expenditures Model
Read this chapter to examine consumption and its determinants within the aggregate expenditures model. Consumption is the largest component of Aggregate Demand the United States, therefore, the factors that determine consumption, also determine the success of the economy.
13.3 Aggregate Expenditures and Aggregate Demand
Case in Point: Predicting the Impact of Alternative Fiscal Policies
Using a large-scale model of the U.S. economy to simulate the effects of government policies, Princeton University professor Alan Blinder and Moody Analytics chief economist Mark Zandi concluded that the expansionary fiscal, monetary, and other policies aimed at relieving the financial crisis (such as the Troubled Asset Relief Program, or TARP) worked together from 2008 onward to effectively combat the Great Recession and probably kept it from turning into the Great Depression 2.0. Specifically, they estimated that U.S. GDP would have fallen about 12% peak-to-trough and that the unemployment rate would have hit 16.5% without these policies, instead of GDP declining about 4% and the unemployment rate reaching about 10%. While they attribute the bulk of the improvement to monetary and other financial policies, they found that fiscal policies also played a substantial role. For example, they concluded that fiscal stimulus added more than 3% to real GDP in 2010.
How much did the different components of the fiscal policies contribute? The following table provides estimates for the multiplied effects of various stimulus measures that were considered. In general, they estimate a stronger "bang for the buck," or multiplier, from spending increases than from tax cuts.
|Tax cuts||Bang for the buck|
|Nonrefundable lump-sum tax rebate||1.01|
|Refundable lump-sum tax rebate||1.22|
|Temporary tax cuts|
|Payroll tax holiday||1.24|
|Across-the-board tax cut||1.02|
|Permanent tax cuts|
|Extend alternative minimum tax patch||0.51|
|Make Bush income tax cuts permanent||0.32|
|Make dividend and capital gains tax cuts permanent||0.32|
|Extending UI benefits||1.61|
|Temporary increase in food stamps||1.74|
|General aid to state governments||1.41|
|Increased infrastructure spending||1.57|
While Blinder and Zandy acknowledge that no one can know for sure what would have happened without the policy responses and that not all aspects of the programs were perfectly designed or implemented, they feel strongly that the aggressive policies were, overall, appropriate and worth taking.