4.2 A Deficit Spending Fiscal Policy Scenario
The impulse responses for a deficit spending fiscal policy scenario are shown in Figure 10.
The policy scenario is designed as a sequence of basic fiscal shocks such that government
spending rises by 1% and tax revenues remain unchanged for four quarters following the
initial shock. As noted above the standard basic government spending shock does not
change tax revenues significantly so the impulses in Figure 10 and are similar to those in
Figure 7. Thus the deficit spending scenario stimulates output and consumption during
the first four quarters although only weakly, it reduces non-residential investment and it
produces a counterintuitive response for prices.
. The policy scenario is designed as a sequence of basic fiscal shocks
4.3 A Deficit Financed Tax Cut Fiscal Policy Scenario