Economic Stimulus Act of 2008 Term Paper

The intention of the Act was to stimulate consumer spending. It focused on lower and middle income Americans, who might be more apt to spend rather than invest or save their tax refund. In other words, a wealthier individual might not hesitate to make a large purchase at any time, regardless of tax policy. But a lower or middle class individual who had been putting off necessary repairs, payments, or other large purchases could not do so, because of a lack of funds. Having received the rebate, the recipient could now spend it on a vital purchase. Some individuals would even receive rebates who had never filed taxes before because their income was so low.

When individuals make purchases, particularly large purchases, cash is infused into the economy. Inventories that have been piling up because of consumer fears of a likelihood of a recession go down. Businesses hire new workers, stimulating both job growth and the purchasing power and confidence of the American consumer.Aggregate demand increases, and the business cycle evades entering a recessionary trough.

Explain the possible "multiplier effect" of the Act

As a result of the multiplier effect, small changes in investment or government spending can create much larger changes in total output. A positive aspect of the multiplier effect is that macroeconomic policy can effect substantial improvements with relatively small amounts of autonomous expenditures (the multiplier effect, 2009, CFA -- Level 1). Theoretically, this relatively small infusion of capital through cutting taxes will result in consumer spending that generates business expansion, more hiring, more jobs being generated, and thus even more consumer-driven spending because of private sector expansion to meet increased demand.

Works Cited

The multiplier effect. (2009). CFA -- Level 1. Investopedia: Study Guide. Forbes.

Retrieved March 10, 2009 at http://www.investopedia.com/study-guide/cfa-exam/level-1/macroeconomics/cfa23.asp

Pender, Kathleen. (2008, February 12). How tax rebates work. SF Gate.

Retrieved March 10, 2009 at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/12/BUOAV0BJP.DTL.....