Expectations and Fiscal Policy Effectiveness
A government is considering a large, temporary increase in public spending to boost economic activity. Explain why the ultimate impact of this spending on the economy might be significantly smaller if households and firms widely expect that taxes will be raised in the near future to pay for it.
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Economics
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Analysis in Bloom's Taxonomy
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Expectations and Fiscal Policy Effectiveness
If households and firms anticipate that a current government spending increase will be followed by future tax hikes to balance the budget, the immediate effect of the spending multiplier will likely be larger than if no future tax hikes were expected.