The difficulties of using fiscal policy to affect the economy include I. the automatic stabilizing effect. II. the crowding out effect. III. the time lag in policy effects.

Question

Quizplus · Accepted Answer

The automatic stabilizing effect refers to government spending and taxation policies that automatically counteract economic fluctuations without any direct intervention by policymakers. This is a benefit, not a difficulty, of fiscal policy.

The crowding out effect occurs when increased government spending results in a decrease in private sector spending. This is a difficulty of fiscal policy and is captured in choice II.

The time lag in policy effects refers to the delay between implementing fiscal policy and seeing its effects on the economy. This is a difficulty of fiscal policy and is captured in choice III.

Therefore, the correct answer is D as it correctly identifies the two difficulties of using fiscal policy to affect the economy.

The Difficulties of Using Fiscal Policy to Affect the Economy