1 / 27

Shir Aharon Chris Bergman Moya Chin

Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion. Increasing the 2009 Stimulus Plan. Team 057. Shir Aharon Chris Bergman Moya Chin.

mari
Download Presentation

Shir Aharon Chris Bergman Moya Chin

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Increasing the 2009 Stimulus Plan Team 057 ShirAharon Chris Bergman Moya Chin Tracie Kong YunHuiLin

  2. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Problem Overview • Effects of Stimulus bill on employment • Multipliers to find effect on GDP • Related GDP change to unemployment change • Timeline of changes • Indicators that will mark recovery • Additional stimulus needed

  3. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Plan 1: Assumptions • The multipliers from Mark Zandi and Paul Krugmanare accurate • Diminishing marginal returns apply to the stimulus multipliers • These diminishing returns can be modeled through an exponential function: multnew=(multoriginal)*(.9)^(money spent/$100 billion) • No other major economic changes will affect employment

  4. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Plan 1: Analysis • “Biggest Bang for the Buck” • GDP effect = (money spent)*(mult)*(.9)^(money spent/100 billion) • % Change in GDP = (GDP effect) / (14.2646 trillion) • % Change in unemployment = (% Change in GDP) / 2.899

  5. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Plan 1: Results • Infrastructure Spending and Aid to State Governments will have the greatest effect on GDP and unemployment. • Food Stamps and Unemployment Insurance Benefits will have the greatest effect per billion dollars spent. • The net effect on GDP will be $845 billion. • The net effect on nominal GDP will be 5.96% of GDP.

  6. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Plan 1: Timeline • Most money will be spent by 2011 • $719 billion • Over half in 2nd year • Will see effects as soon as 6 months later

  7. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Economic Results • A mix of leading indicators and fundamental statistics in the economy • Manufacturing Sector and Consumer Sentiment are historic leading indicators • An upturn in the Housing Sector is necessary for a recovery • Lowering unemployment and raising GDP are the ultimate goals

  8. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Manufacturing Sector

  9. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Future Housing Activity

  10. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Home Builders’ Predictions

  11. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Consumer Sentiment

  12. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Unemployment Rate

  13. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP Change

  14. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Modeling the Relationship Between Real GDP and the Unemployment Rate • “Okun’s Law” • For every 1% increase in unemployment, there is a 2-3% • decrease in GDP • GDP = V * (I + C) • This equation was used to calculate a more accurate • multiplier

  15. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Assumptions Made • On a large time scale, unemployment is the only factor affecting real GDP • Other factors affecting GDP will affect unemployment rates in a similar manner, thus eliminating its effects in the long run • The unemployment compensation in the district of St. Louis, MO is representative of the compensation throughout the entire country • CA, TX, FL, NY were used to represent the populated states of the West Coast, Southwest, Southeast, and Northeast respectively; ID represents the sparsely populated states of the Midwest, West, South • Workers are either single or part of a married couple filing separate tax returns

  16. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP = V * (I + C) Calculating I, the Income remaining after Federal and State Tax • Part A: Calculating I, the taxable income • 3 Major Sectors of American Industry Experiencing Significant Job • Loss: Manufacturing, Construction, Financial Activities • The following calculations were performed for each sector • Umonth1 – Umonth2 = ∆U, the number of newly unemployed in consecutive months • Ew * 4 = EM • EM * 12 = EY • -EY * ∆U = EY lost due tounemployment

  17. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP = V * (I + C) Calculating I, the Income remaining after Federal and State Tax • Part B: Applying Federal Taxes to the Calculated values of I • IRS income tax brackets: $4386.25 + 0.25 (EY lost - $31850) = Tlost • -Tlost * ∆U = TF,lost • This represents the amount of federal tax revenue lost due to • unemployment between consecutive months

  18. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP = V * (I + C) Calculating I, the Income remaining after Federal and State Tax • Part C: Applying State Taxes to the Calculated values of I • Different states have different taxing policies. Using the 5 states chosen in our “Assumptions” section, we calculated an average tax rate to apply to all taxable income, regardless of the location. This average tax rate was 6%. • (EY - TF ) * ∆U * 0.06 = TS, lost • Part D: Calculating The Amount of Income Lost due to Unemployment • (EY,lost ) - (TF,lost ) - (TS,lost ) = $ Lost in Sector • Part E: Calculating I, the Income Remaining after Federal and State Taxes • ($ Lost in Manufacturing) + ($ Lost in Construction) + ($ Lost in Financial Activities) = I

  19. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP = V * (I + C) Calculating I, the Income remaining after Federal and State Tax • Total C in St. Louisx Total Pop. in U.S. = Total C in U.S. • Pop. in St. Louis • Total C in U.S. = C per Unemployed Worker • Total U in U.S. • (∆ nonfarm payroll employment) * (C per worker) • = ∆ Unemployment Compensation

  20. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP = V * (I + C) Calculating V, the Velocity of Money • V = (PQ) / M • P is the price level • Q is the GDP • M is the money supply • Note: a 2001 chain-typed index was used for GDP, M1 money supply and price level

  21. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion GDP = V * (I + C) Calculating GDP Loss • Returning to the equation we had formulated, we plugged in the values we had obtained for I, C, and V • We divided our calculated GDP loss by the percent change in nonfarm payroll for the years 2000 through 2009; this value represents the ratio between GDP loss and unemployment rates • We averaged these values to reduce irregularities • This gave us 2.899 as the ratio between a 1% increase in unemployment and the % decrease in GDP.

  22. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Second Plan: Goals • Reduce unemployment to 5% from peak of 9.1% • Requires $1.8 trillion or 11.9% increase in GDP • Likely to be greater than first, due to diminishing marginal returns • 4.1% decrease in unemployment=11.9%/2.899 • Allocates money most effectively

  23. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Second Plan: Assumptions • Can treat both plans as simultaneous effects • Multipliers have diminishing marginal return of an exponential 0.9 per $100 billion • Only top 6 multipliers need to be considered • 1.02*0.9^(520/100) = 0.59 • $5 billion increments is sufficient

  24. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Second Plan: Algorithm Initialize money allocation • Added multipliers sequentially • High to low • Set high bounds by previous runs Calculate net effect Compare to best plan Loop over all money allocations

  25. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Second Plan: Results

  26. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Conclusion • First stimulus plan: • Costs $800 billion and leads to $850 billion effect • Majority spent and takes effect in first 3 years • Economic indicators will indicate when economy recovers and the effects of the stimulus • Every 2.899% change in GDP reduces unemployment by 1% • Second stimulus plan: • $960 billion additional stimulus plan needed • Will reduce unemployment from 9.1% to 5%

  27. Introduction Stimulus Plan 1 Economic results Okun’s Law Stimulus Plan 2 Conclusion Increasing the 2009 Stimulus Plan Team 057 ShirAharon Chris Bergman Moya Chin Tracie Kong YunHuiLin

More Related