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Government spending, aggregate demand, and economic growth

Amitava Krishna Dutt

Keywords: fiscal policy; government debt; economic growth; aggregate demand

This paper develops a simple Keynesian model of growth with endogenous technological change in which the long-run rate of growth of the economy is determined by both demand and supply forces to examine the effects of government fiscal policy. The paper first assumes that the government budget is balanced and shows that the long-run rate of growth of the economy is path-dependent, that fiscal policy affects the rate of growth of the economy in the short run as well as the long run, and that different types of government spending have different effects. It then introduces government deficits and debt into the analysis to show that even if one takes into account adverse effects of debt accumulation on long-term interest rates and investment, fiscal expansion can have positive growth effects.

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