ABSTRACT
In Chapter 2 we mentioned the ‘Treasury View’ of the 1930s: that fiscal policy cannot alter aggregate demand. The Keynesian theory outlined in Chapter 2 led to the opposite view: that policy can alter aggregate demand. As explained there, generally the effects of fiscal policy will be reduced by crowding-out of some investment due to rises in interest rates but, except in the special case in which the velocity of circulation of money is completely constant, there will be some effect of fiscal policy on aggregate demand in a closed economy. The rise in interest rates and the crowding-out which results could, of course, be avoided by a judicious use of monetary policy.
