On the Efficacy of Fiscal Policy and Price Level Changes

Abstract

Among many studies on fiscal policies there is the theoretical study by Blinder and Solow. In this study, they demonstrate two propositions concerning the efficacy of fiscal policy. However, because these propositions are based on the assumption that theprice level is constant, it is necessary to examine whether these two propositions are true or not in the context of flexible price level. We have presented the Blinder and Solow model that incorporates the equation of price level determination and demonstrated that even if the system is stable, the two propositions are not necessarily true in the context of a flexible price level. We can obtain the two propositions contrary to those obtained by Blinder and Solow when the value of the rate of inflation is high.