How might expectations of a fiscal policy being temporary weaken the effects of that policy?

Asked on by pamela0317

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The point of a fiscal stimulus (the most typical kind of fiscal policy) is to encourage people to spend more money so that aggregate demand will go up and the economy will grow.  If people expect that the policy will only be temporary, though, they may not spend so much of the money that they get from the government spending and/or tax cuts.  In economic terms, their marginal propensity to consume will go down and so will the multiplier effect of the fiscal policy.

So, the problem is that people who expect that the policy will be temporary might save their money instead of spending it.  This reduces the effects of the policy because it reduces the impact that it has on aggregate demand.

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