Is Fiscal Spending Expansionary in a Dual Economy?

Is Fiscal Spending Expansionary in a Dual Economy?

A two-region, three-sector, general equilibrium model is utilized to analyze effects of fiscal spending upon a dual economy. We examine the effects of fiscal spending on services prices, the urban unemployment ratio, and national income. The main result of this paper is that fiscal spending may be effective in mitigating unemployment, as Keynesian economists have believe. More importantly, the fiscal policy may even be contractionary under certain plausible conditions.