12) (10 points) In order to stimulate the economy, the US government
sometimes gives direct payments to individuals.
If we assume that 90% of each stimulus dollar is spent and then immediately
taken out of circulation, then each dollar provides 0.9 dollars of stimulus to the
economy.
If we assume that 90% of each stimulus dollar is spent, and 90% of each of those
dollars is spent again before being taken out of circulation, then each dollar
provides $0.9 + 0.9(0.9) = 1.71$ dollars of stimulus to the economy.
a) Calculate the total stimulus per dollar under the assumptions that:
• Each person who receives any money from the stimulus either directly or
indirectly spends 70% of it, and
• The stimulus money never leaves circulation (so that every merchant who
receives a dollar also spends 70% of that dollar, and so on).
b) Assume the stimulus money never leaves circulation and that everyone
spends x% of it. Set x so that the total economic stimulus per dollar is one dollar.
13) (9 points) What is order of contact and how is it measured?
