Government and Fiscal Policy
Read this chapter to learn about how the government's fiscal actions influence aggregate demand. The chapter first introduces the components of the government's budget and then discusses discretionary fiscal policy and automatic stabilizers used to influence the economy. Some lags in the implementation of fiscal policy are identified and the concept of crowding out is introduced. Attempt the "Try It" exercises at the end of the section.
3. Issues in Fiscal Policy
Do the following hypothetical situations tend to enhance or make more difficult the use of fiscal policy as a stabilization tool?
- Better and more speedily available data on the state of the economy
- A finding that private sector investment spending is not much affected by interest rate changes
- A finding that the supply-side effects of a tax cut are substantial