Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy can affect ________ as well as aggregate demand and that fiscal policy is ________.
A)consumption; too flexible
B)potential output; not flexible enough
C)consumption; offset by automatic stabilizers
D)potential output; offset by automatic stabilizers

Question

Quizplus · Accepted Answer

Fiscal policy can affect potential output because incentives to work are often reduced when tax rates or transfer payments increase. Also, fiscal policy requires governmental approval which often takes a long time.

Two Drawbacks in Using Fiscal Policy as a Stabilization Tool