Exploring Fiscal Policy at Zero Interest Rates in Intermediate Macroeconomics

Since the financial meltdown of 2007, advanced macroeconomic theory has delved more deeply into the question of the appropriate fiscal policy when the nominal interest rate is close to or at zero percent. Such analysis is typically conducted with the aid of New Keynesian Dynamic Stochastic General Equilibrium models. The policy implications are, in some cases, surprising. Multipliers can change by large magnitudes, and the signs of some tax multipliers are reversed. The authors show how these results can be clearly presented to an intermediate undergraduate audience within the standard IS-MP and AD-AS framework of Jones (2011).