216 Assignment Solution: Policy Response to a Macro Shock

Monetary policy was ineffective, suggesting the economy may have been in a liquidity trap. You can’t push on a string, etc. Many economists would argue that the fiscal stimulus was inadequate, given the size of the recession. If there’s ever a case for a Keynesian response it should be when it’s a deep recession. The argument would be weaker for something like the 1990 recession, which corrected before we knew we were in it. So, the most likely answer for students to come up with is a stronger fiscal stimulus. It’s also possible that no stimulus might have been better, that the fiscal and monetary stimuli will ultimately make the economy fluctuate more in the end.