The Great Recessionary Gap and the 2009 Stimulus
Context for Use
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
References and Resources
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.