This paper, authored by Marianne Baxter and Robert G. King, explores the effects of fiscal policy within a quantitative general equilibrium model. The authors find that the basic neoclassical model has significant dynamic interactions between capital and labor in response to policy disturbances, which alter standard neoclassical predictions about the equilibrium effects of fiscal policy. Key findings include: 1. **Long-Run Multiplier**: There is likely a long-run multiplier associated with changes in government purchases. 2. **Permanent vs. Temporary Changes**: Permanent changes in government purchases induce larger effects than temporary changes. 3. **Financing Decision**: The financing decision associated with changes in government purchases is quantitatively more important than the direct resource cost of these changes. 4. **Public Investment**: Public investment policies have dramatic effects on output and private investment. The paper also discusses the historical context of fiscal policy in the United States, from 1930 to 1985, highlighting the increasing share of government spending and taxation. The authors use a dynamic competitive model to analyze the macroeconomic consequences of fiscal policy, focusing on the effects of permanent and temporary changes in government purchases, the impact of different financing methods, and the effects of government purchases that directly affect private marginal utility or productivity. The paper concludes with implications for empirical research, suggesting that future studies should consider the public finance decision and distinguish between capital and labor income taxation.This paper, authored by Marianne Baxter and Robert G. King, explores the effects of fiscal policy within a quantitative general equilibrium model. The authors find that the basic neoclassical model has significant dynamic interactions between capital and labor in response to policy disturbances, which alter standard neoclassical predictions about the equilibrium effects of fiscal policy. Key findings include: 1. **Long-Run Multiplier**: There is likely a long-run multiplier associated with changes in government purchases. 2. **Permanent vs. Temporary Changes**: Permanent changes in government purchases induce larger effects than temporary changes. 3. **Financing Decision**: The financing decision associated with changes in government purchases is quantitatively more important than the direct resource cost of these changes. 4. **Public Investment**: Public investment policies have dramatic effects on output and private investment. The paper also discusses the historical context of fiscal policy in the United States, from 1930 to 1985, highlighting the increasing share of government spending and taxation. The authors use a dynamic competitive model to analyze the macroeconomic consequences of fiscal policy, focusing on the effects of permanent and temporary changes in government purchases, the impact of different financing methods, and the effects of government purchases that directly affect private marginal utility or productivity. The paper concludes with implications for empirical research, suggesting that future studies should consider the public finance decision and distinguish between capital and labor income taxation.