CASE STUDY: What's in Obama's stimulus plan

By Annalyn Censky and Charles Riley @CNNMoney September 8, 2011: 9:39 PM ET

NEW YORK (CNNMoney) -- President Obama unveiled a stimulus plan Thursday night
that he says will boost hiring and provide a jolt to the stalled economy if it becomes law.
A mix of $253 billion in tax cuts and $194 billion in new spending, the total bill for the
plan is $447 billion. Given staunch Republican opposition to most new spending, the
measure has almost no chance of passing the House in its current form.

So what exactly does the president want Congress to do?

TAX CUTS
Payroll tax cuts: Employees normally pay 6.2% on their first $106,800 of wages into Social
Security, but they are now paying only 4.2%. That tax break is set to expire at the end
of the year, and Obama would like to expand and extend it. He would cut it in half to
3.1%. Obama also wants to cut the payroll tax businesses pay in half -- to 3.1% -- on the
first $5 million in wages. And if a business hires a new worker or gives an existing
worker a raise, all payroll taxes will be waived.
Total cost: $240 billion, or more than half the total package.

Other tax measures: Obama would offer $8 billion in tax credits for companies that hire
workers who have been unemployed for six months or more and $5 billion in tax
incentives for companies to invest in equipment and plants.

SPENDING

Infrastructure bank: Democrats, and Obama in particular, love talking about investments in
infrastructure. One top priority: a national "infrastructure bank." Here's how it would
work: After an initial round of funding -- Obama called for $10 billion -- the bank
would offer loans to give private-sector projects a jolt of money. Eventually, interest paid
on the loans would make the bank self sufficient.

Immediate surface transportation: Nodding to an idea supported by both the AFL-CIO

and the U.S. Chamber of Commerce, Obama proposed $50 billion in immediate funding
for highways, transit, rail and aviation.

Modernizing schools/vacant property: The president wants to spend $25 billion to

modernize at least 35,000 public schools. In addition, $5 billion would go to improving
community colleges.

Extend unemployment benefits: Nearly 43% of the unemployed have been so for more
than six months -- a drag on the economy that Obama wants to soften by extending
unemployment benefits once again. Lawmakers first lengthened unemployment benefits
to the current 99 weeks in 2009, and then reauthorized the measure five times since.
The White House estimates another extension would cost $49 billion.
Help for long-term unemployed: The president wants a new tax credit of up to $4,000 for
businesses that hire workers who have been out of a job for over six months.

Subsidized jobs training: Following the lead of a job training program in Georgia,
Obama wants to offer the unemployed a chance to work temporarily as a way to build
their skills while they search for a permanent job.

Teaching and first responder jobs: Obama is asking for $35 billion to be pumped into local
communities to keep teachers and first responders on the job, while also allowing for
some new hiring. Of that, $30 billion would go to educators, and the rest to first
responders.

Summer jobs: Obama wants to give hundreds of thousands of youth "the hope and dignity
of a summer job next year." The unemployment rate for youth ages 16 to 24 rose to a
record high this summer.

ALSO ...

Housing help: He also vowed to work with Fannie Mae and Freddie Mac to help
homeowners refinance their mortgages at historically low interest rates around 4%.
(Check Obama's housing scorecard).

How he'd pay for his plan: Obama vowed his plan would be fully paid for and asked the
new debt super committee, already charged with proposing between $1.2 trillion and $1.5
trillion in debt reduction over a decade, to add the cost of American Jobs Act to its goal.
So presumably if the panel did that, its new target would move closer to $2 trillion.

The president said he would submit his debt-cutting plan to the super committee on Sept. 19.
He characterized it as "ambitious - a plan that will not only cover the cost of this jobs bill,
but stabilize our debt in the long run."

His recommendations will include additional spending cuts that would phase in gradually,
"modest adjustments" to Medicare and Medicaid, and a tax reform plan 'that asks the
wealthiest Americans and biggest corporations to pay their fair share."
 PROBLEMS AND APPLICATIONS

1. The aggregate expenditure model focuses on the ________ relationship between real
spending and ________.
A) short-run; real GDP
B) short-run; inflation
C) long-run; real GDP
D) long-run; inflation

2. The key idea of the aggregate expenditure model is that in any particular year, the level
of GDP is determined mainly by
A) investment spending.
B) export spending.
C) government spending.
D) the level of aggregate expenditure.

3. Aggregate expenditure includes spending on

A) C + I + G.
B) C + I + G - Imports.
C) C + I + G + NX.
D) C + I + depreciation - NX.

4. Inventories refer to
A) goods which have been presold before they are produced.
B) goods that have been produced but not yet sold.
C) goods that have been planned but not yet produced.
D) goods that have been produced and sold in the same year.

5. Macroeconomic equilibrium occurs when

A) aggregate expenditure = GDP.
B) aggregate expenditure = C+ I + G + net transfers.
C) aggregate income = planned inventories.
D) aggregate expenditure = planned inventories.

6. Consumption spending will ________ when disposable income ________.

A) increase; increases
B) increase; decreases
C) decrease; increases
D) change unpredictably; decreases

7. The marginal propensity to consume is defined as

A) consumption divided by disposable income.
B) disposable income divided by consumption.
C) the change in consumption divided by the change in disposable income.
D) the change in disposable income divided by the change in consumption.
8. The marginal propensity to save is defined as
A) saving divided by disposable income.
B) disposable income divided by saving.
C) the change in saving divided by the change in disposable income.
D) the change in disposable income divided by the change in saving.

9. The sum of the marginal propensity to consume and the marginal propensity to save is
always equal to
A) zero.
B) 0.5.
C) 1.
D) 100.

10. If disposable income increases by $500 million, and consumption increases by $400
million, then the marginal propensity to consume is
A) 1.25.
B) 0.8.
C) 0.6.
D) 0.4

11. If the MPC is 0.95, then a $10 million increase in disposable income will
A) increase consumption by $200 million.
B) increase consumption by $9.5 million.
C) decrease consumption by $105 million
D) increase consumption by $950 million.

12. If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable
income will
A) increase consumption by $7,500.
B) increase consumption by $2,500.
C) decrease consumption by $7,500.
D) decrease consumption by $2,500.

13. If an increase in investment spending of $50 million results in a $200 million increase
in equilibrium real GDP, then
A) the expenditure multiplier is 0.125.
B) the expenditure multiplier is 8.
C) the expenditure multiplier is 0.25.
D) the expenditure multiplier is 4.

14. If an increase in government expenditure of $10 million results in a $50 million

increase in equilibrium real GDP, then
A) the MPC is 0.5.
B) the MPC is 0.75.
C) the MPC is 0.8.
D) the MPC is 0.9.
15. All of the following are true statements about the multiplier except
A) the multiplier rises as the MPC rises.
B) the smaller the MPS, the larger the multiplier.
C) the multiplier is a value between zero and one.
D) the multiplier effect occurs when autonomous expenditure changes.

16. Assume the economy is experiencing a $500 billion out gap = booming = output >
potential output.( reduce output) With a MPC of 0.80, how much would government
expenditures have to change by to push the economy back to full employment?
A) $500 billion
B) $100 billion
C) 125 billion
D) cannot be determined

17. Given a closed economy with: autonomous consumption equals 300, MPC = 0.8;
investment = 200; government spending = 300, tax rate = 25%.
a. Write the consumption function
b. Write the APE function
c. Determine the equilibrium yield
d. Assume the government increases spending by 200, calculate the spending multiplier
and the changes in the equilibrium yield.

18. Given an open economy with: X = 5; MPM = 0.14; autonomous consumption = 10;
MPC = 0.8; I = 5; government spending = 40, tax rate = 20%

a. Determine the autonomous spending of the economy

b. Write the APE function
c. Determine the equilibrium yield
d. Determine the trade balance and budget balance at the equilibrium yield.