Lecture 15
FISCAL POLICY

1. Effect of fiscal policy on GDP

• Expansionary fiscal policy:
  Policy that leads to higher output

• Contractionary fiscal policy:
  Policy that leads to lower output

2. Shortcomings of fiscal policy

• Today's policy may have undesirable effects in the future
  • Crowding out:
    Higher budget deficit today leads to less private investment ...
    ... resulting in slower capital accumulation in the future

• Lack of information:
  Govt doesn't know the exact magnitude of the multiplier

• Moving target:
  Full-employment GDP changes over time (why?)

• Policies may be used for political purposes (no kidding!):
  Pork-barrel politics

• Lags involved in policymaking:
  Both Congress and President have to agree