The Great Recessionary Gap and the 2009 Stimulus

W. Edward Chi, University of Southern California
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Summary

Teams use a Keynesian model of GDP change in the short-run in understanding potential reasons behind the 2009 stimulus's effect on the recessionary gap.

Context for Use

Students should have basic familiarity with a Keynesian model of short-run changes in GDP including the role of autonomous aggregate spending (AAS), the marginal propensity to consume (MPC), and fiscal stimuli. As part of the prior preparation or after the activity concludes, students can be directed to read post-hoc evaluations of the fiscal stimulus and its effect (see Additional Resources).

Overview

The goal of the activity is for students to discuss components of a Keynesian model of GDP in understanding the effect of the 2009 American Recovery and Reinvestment Act's (ARRA) fiscal stimulus involving autonomous aggregate spending (AAS) and the marginal propensity to consume (MPC).

Students are told about the 2009 ARRA and associated $800 billion increase in AAS from planned government spending and tax cuts. Students are also told about the $1,000 billion recessionary gap at the time that persisted for years. The attached visual from the Congressional Budget Office illustrates the gap. Teams are then presented the following question and asked to answer as a team by holding up a letter placard when time is called. After the simultaneous report, the facilitator leads a discussion of teams' choices.

What is the most likely reason why the ARRA stimulus did not close the recessionary gap more quickly, with the gap persisting for so many years?
A. The MPC was lower than estimated
B. The MPC was higher than estimated
C. The $800 billion increase was too small
D. The $800 billion increase was too large
E. The $800 billion was not spent effectively

Expected Student Learning Outcomes

Use a Keynesian model of GDP change to understand the effect of a fiscal stimulus in the short run.

Understand the relationships among MPC, AAS, and short-run GDP.

Understand that the model's predictions rely on assumptions about planned fiscal spending and estimates of the MPC.

Information Given to Students


The persistent recessionary gap figure (Microsoft Word 2007 (.docx) 52kB Jan6 18)

Teaching Notes and Tips

Choices A, C, and E are plausible answers. All could be argued correct, since the gap did not close quickly—because, for example, the MPC was smaller than estimated at the time (implying A was correct), the size of the gap was underestimated (implying C was correct), or federal spending was not targeted effectively (implying E was correct). The facilitator can also note that the ARRA also involved tax cuts, which would increase the size of the AAS.

Assessment

In a summative assessment, students can be individually asked a similar question about the 2001 or other recession and associated stimuli.

References and Resources

Students may be directed to the following article prior to the activity or after the activity is completed to provide additional context and arguments to consider.

Resource: https://www.nytimes.com/2014/02/21/opinion/krugman-the-stimulus-tragedy.html . The resource is an op-ed including an argument that the stimulus was too small.

Resource: https://www.cfr.org/backgrounder/stimulus-report-card . The resource includes critiques of the design of the stimulus, including its spending plans.