Fiscal Policy

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Fiscal Policy Most people nowadays seem to think that fiscal policy cannot be used to influence economic activity, and they are supported in this view by the majority of professional macroeconomists. Students are taught that output and employment are determined by the demands and supplies of individuals interacting in a gigantic market and that governments cannot alter the outcome of this process except temporarily and destructively. The Congressional Budget Office (CBO) bases its projections of the federal budget on assumptions about output that are largely independent of fiscal policy. An increase in federal expenditure, the CBO assumes, will have no positive effect at all on real output; rather, it will have a negative effect, since it may cause a rise in interest rates and thus a fall in private, interest-sensitive spending. More generally, there is a public perception that a budget deficit is just a way for the present generation to steal from the next. As a leading politician recently put it, "The deficit is a big black dog eating the luncheon packets of our children." ...

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