Fiscal policy involves budgetary measures in which the government carries through a deficit budget in order to stimulate the economy by charging lower corporate taxes. In other words fiscal revenue in the given fiscal year will be less than government expenditure on projects. These projects are naturalluy intended to stimulate spending and subsequent economic growth (Ertl, 2008). When the government spends more than what it collects by way of taxes, especially business taxes, more money would be left in the hands of the people and businesses to spend or/and save. When such money comes into circulation the economy gets a boost.
Fiscal stimulus programs are intended to solve the problem of persistent unemployment and underemployment in the economy through government spending. However they don't always produce the desired outcomes. For instance representative agent models in varying degrees point out to the fact that the outcomes of such fiscal stimulus programs might be negated without the slightest warning because some or all the variables in the model go awry due to some reasons which were not foreseen at the time of planning. The government might adopt a deficit budget approach and expect the economy to respond accordingly (Garrett, Graddy, & Jackson, 2008). However as many such fiscal policy alternatives suggest there can be unforeseen forces that would interfere with the macroeconomic variables and produce unexpected negative results.
Harrod-Domar Model, for example, assumes that there is a surplus of labor so that general unemployment acts as a stimulus for the unemployed to accept jobs at the going wage rate. Secondly it assumes that all production is proportional to the capital stock. Given these two assumptions the econmy would be able to absorb the extra spending of the government and the private enterprise to fuel a new cycle of growth. However there is a snag by way of the prevalent real wage rate in the economy (Hemming, R., Kell, M., Mahfouz, S. & International Monetary Fund, 2002). Assuming that the real wage rate is either stagnant or grows at a rate less than the rate of inflation, then there is the crux of the matter. Will those unemployed be prepared to accept jobs at the existing wage rate It depends on two outcomes. If there are more jobs than what unemployed people would want, then there could be an upward pressure on wages simply through the intervention of the economic law "when demand (for labor) is greater than supply (of labor), the wage rate would rise". Secondly if there are more unemployed people than the available number of jobs, the reverse of the above law will apply. In the second instance, depressed wages would bring down costs of production and though the aggregate demand in the domestic economy would be lower there would be a greater demand for the country's exports.
In fact this argument has both a Keynesian/Neo-Keynesian and Classical/Neoclassical flavor. However if monetarist theoretical underpinnings were introduced into the argument through inflationary pressures that result from the government's and private enterprise's initial spending round, then those outcomes as predicted by the first representative agent models wouldn't hold but a new set of