Question

using the CARES Act, a $2.2 trillion stimulus package, the U.S. government is sending stimulus payments to millions of Americans. Explain how this affects the IS curve. How does you answer depend on the way in which the spending is financed and on

the extent to which Ricardian equivalence holds?

Answer 1

US government has announced the stimulus package of $ 2.2 trillion to address the economic problems that have been triggered by the COVID-19 pandemic.

It would increase the demand in economy, thus the IS curve will shift to right thereby driving up the aggregate output and interest rate. thus, expansionary fiscal policy is likely to moderate the effects of recession.

Some economists contend that if ricardian equivalence holds, the expansionary fiscal policy would not be effective in addressing the issue of recession. Increase in the government debt owing to rise in the expenditure would compel the government to increase the taxes over the long run, thus people know that government most probably increase the tax rate over the long run. Thus people reduce their present consumption and save more to payoff the debt. it would make the expansionary fiscal policy quite ineffective in dealing with recession like situation.