The effects of randomly generated disturbances and fiscal policy on an aggregate demand macroeconomic model

Abstract

This paper examines the effects of stochastic disturbances on the final output (GNP) of an economy. A GPSS econometric model was constructed, tested, and validated. Utilizing the model, various strategies (fiscal policies) were examined in an effort to reduce the variance in GNP that is caused by the random disturbances of the exogenous variable, fixed investment. The policy considerations were incorporated into the model using feedback mechanisms which predict GNP. The resulting impact of the strategies are discussed. This model lends insight to the economic planner to evaluate the alternatives in a dynamic framework as contrasted to the classical comparative static analysis.