Scholarly Comments on Academic Economics

Textbooks and Pure Fiscal Policy: The Neglect of Monetary Basics

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*Lee C. Spector* is Associate Professor of Economics at Ball State University. He obtained his Ph.D. at the University of Iowa and has published in, among others, _Empirical Economics, Journal of Macroeconomics, Public Finance/Finances Publiques, Economic
*T. Norman Van Cott* is Professor of Economics at Ball State University. He obtained his Ph.D. at the University of Washington and has published in, among others, _The Independent Review, Economic Inquiry, Constitutional Political Economy, Eastern Economi

Abstract

Pure fiscal actions—fiscal actions that leave the money supply unchanged—cannot alter aggregate demand without concomitant support from the monetary sector. At the initial level of output, either the demand for money or the quantity of money demanded must change appropriately. Alternatively, since money demand and money velocity are two sides of the same coin (no pun intended), the velocity of money at the initial level of output must change exogenously or endogenously. Otherwise, aggregate demand is unchanged. This unassailable monetary proposition is consistently ignored in current macro-monetary textbook literature. These authors argue that the monetary sector moderates the expansionary/contractionary thrust of pure fiscal actions, whereas arguments grounded in monetary basics would claim that the monetary sector is the source of whatever expansion/contraction occurs. One must go back upwards of thirty years to find textbook authors correctly incorporating monetary basics in their analysis of pure fiscal actions.

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Volume (Issue)
Pages
60-70
Published
JEL classification
A22, E4, E62
Keywords
Pure fiscal policy, monetary basics, IS-LM
Article Downloads (all formats)
3388 since Jan 2007

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