This paper examines the effects of government spending shocks on consumption, addressing the discrepancy between empirical evidence and existing optimizing business cycle models. The authors extend the standard New Keynesian model to include rule-of-thumb (non-Ricardian) consumers, who do not borrow or save but consume their wage income. They show that the interaction of rule-of-thumb consumers with sticky prices and deficit financing can account for the observed effects of government spending on consumption. The paper begins by reviewing the existing empirical evidence, which suggests that government spending shocks lead to a significant increase in consumption, while investment either falls or does not respond significantly. This evidence aligns with IS-LM models but conflicts with neoclassical models. The authors then develop a dynamic general equilibrium model that incorporates rule-of-thumb consumers and sticky prices. They analyze the model's equilibrium dynamics and find that the coexistence of sticky prices and rule-of-thumb consumers is necessary for an increase in government spending to raise aggregate consumption. The model predicts responses of aggregate consumption and other variables that are consistent with the empirical evidence. The paper concludes by discussing the conditions under which the model can generate positive comovements of consumption and government purchases, providing insights into the procyclical response of consumption to government spending shocks.This paper examines the effects of government spending shocks on consumption, addressing the discrepancy between empirical evidence and existing optimizing business cycle models. The authors extend the standard New Keynesian model to include rule-of-thumb (non-Ricardian) consumers, who do not borrow or save but consume their wage income. They show that the interaction of rule-of-thumb consumers with sticky prices and deficit financing can account for the observed effects of government spending on consumption. The paper begins by reviewing the existing empirical evidence, which suggests that government spending shocks lead to a significant increase in consumption, while investment either falls or does not respond significantly. This evidence aligns with IS-LM models but conflicts with neoclassical models. The authors then develop a dynamic general equilibrium model that incorporates rule-of-thumb consumers and sticky prices. They analyze the model's equilibrium dynamics and find that the coexistence of sticky prices and rule-of-thumb consumers is necessary for an increase in government spending to raise aggregate consumption. The model predicts responses of aggregate consumption and other variables that are consistent with the empirical evidence. The paper concludes by discussing the conditions under which the model can generate positive comovements of consumption and government purchases, providing insights into the procyclical response of consumption to government spending shocks.