B. FISCAL POLICY IN THE MULTIPLIER MODEL

For centuries, economists have understood the allocation role of fiscal policy (government tax and spending programs). It has long been known that fiscal programs are instrumental in -deciding how the nation’s output should be divided between collective and private consumption and how the burden of payment for collective goods should be divided the population.

Only with the development of modern macroeconomic theory has a further surprising fact been uncovered: government fiscal powers also have a major macroeconomic impact the short-run movements of output, ’employment, and prices. The knowledge that fiscal policy has powerful effects upon economic activity led to the approach to macroeconomic policy, which is the active use of government action to moderate business cycles. The approach was described by the Nobel-prize winning macro economist James Robin, as follows.

Keynesian policies are, first. the explicit dedication of macroeconomic policy instruments to real economic goals. in particular full employment and real growth of national income. Second, Keynesian demand management is activist. Third Keynesians have wished to put both fiscal and monetary policies in consistent and coordinated harness in the pursuit of macroeconomic objectives.

In this section we use the multiplier model to show how government purchases after output.

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