The worst case for fiscal policy is when a recession is caused by a real shock.

Question

Quizplus · Accepted Answer

When a recession is caused by a real shock such as a natural disaster or a pandemic, it can be difficult for fiscal policy to effectively stimulate the economy. This is because the cause of the recession is not simply a lack of aggregate demand which fiscal policy can address. Instead, the shock may have disrupted supply chains, caused physical damage to infrastructure, or resulted in widespread illness and quarantine measures. These factors may limit the ability of fiscal policy to restore economic growth, making it the worst case scenario for fiscal policy.

The Worst Case for Fiscal Policy Is When a Recession