What was the effect on inflation?
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Background
Policymakers ramped up both fiscal and monetary policy in order to counteract the plunge in economic activity during the Covid-induced recession in 2020.
Part A
The first part of this section describes the fiscal policies implemented in response to the plunge in economic activity. The second part describes the monetary policies. Follow the instructions for either the Monetary or Fiscal Policy sections and then do Part B.
Choice 1) Fiscal Policy: Congress and the Administration (Presidents Trump and Biden) sent a total of three rounds of payments to people who were eligible: $1,200 in April 2020, $600 in December 2020, and $1,400 in March 2021.
You can see the impact of these payments by looking at disposable personal income (FRED ticker: DSPI). i) Paste in a chart from FRED showing the level of disposable income from 2019 through 2022.
Part B
Use the Aggregate Demand and Supply Model to explain the goal of the policies implemented during the recession.
Before the stimulus
Draw a chart showing how Aggregate Demand and Short-term and long-term Aggregate Supply changed during the early stages of the lockdown—before the stimulus programs were implemented. Be sure to label the chart correctly. Include in your description how the short-term equilibrium differed from the long-term equilibrium. You can use figure 13.6 on page 457 in the text as a guide, but the circumstances here are different so your chart will not look the same. Refer to the class Lecture Slides if you need a refresher on what happened during Covid.
After the stimulus
Referring to the chart you drew, which curve did the policy actions attempt to change? (No need to draw another chart).
Did the policies succeed in restoring full employment? (Look at a chart of UNRATE in FRED, no need to include the chart in your writeup).
What was the effect on inflation? (Look at a chart of CPIAUCSL % Change from Year Ago, again no need to include the chart in your writeup).
In retrospect, do you think that the policy actions were needed and of the right magnitude? Should policymakers have done some things differently?
ii) Point out how the stimulus payments affected disposable income. You can place notations on the chart or just write out a description in your text.
