The Role for Discretionary Fiscal Policy
S. fiscal policy has been responsive to both cyclical and budgetary conditions. Table 3, Determinants of Discretionary Spending, ˘relates actual year-to-year changes in discretionary spending to the prior yearĂs GDP gap and budget surplus, all relative to full-employment GDP÷ in contrast to just considering changes in forecast spending of a discretionary nature. The table shows that the GDP gap was insignificant, and Auerbach concludes that this indicates a weak relationship, at least at the annual level. He further states that ˘the magnitude and timing of discretionary responses is only part of the story concerning the efficacy of fiscal policy as a tool for macroeconomic stabilization.÷ (Auerbach, 2002, p. 10). He goes on to discuss automatic stabilizers, federal spending and federal tax revenues in particular. He measures the strength of automatic stabilizers by relating the gap ˘between the full-employment surplus and the unadjusted surplus to the contemporaneous gap between GDP and full employment GDP. The coefficient of this relationship indic

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