Stimulus Debate Turns on Rebates

As pressure builds on Washington to juice the economy, a one-time consumer rebate has emerged as the likely ceterpiece of a $150 billion stimulus program. But Democrats and Republicans still disagree on who should actually get rebates. Bush has said he wants rebates for those who pay income taxes. Democrats contend such an approach would mean tens of millions of households would get only a partial rebate or none at all.

Proponents of the rebate-for-all assert that more of lower- and middle-income households should be included in any rebate plan because they are more likely to spend a bigger chunk of their rebate than higher-income households and targeted to people most likely to spend it quickly, every dollar spent on stimulus could generate a dollar in gross domestic product. CNN, January 22, 2008.

a. Explain the intended effect of the $150 billion fiscal stimulus package and draw a graph to illustrate the effect.

b. Explain why the effect of this fiscal policy depends on who receives the tax rebates.

c. What would have a larger effect on aggregate deman: $150 billion worth of tax rebates or $150 billion worth of government spending?

d. Explain whether a stimulas package centered around a one-time consumer tax rebate is likely to have a small or a large supply-side effect.