A reason why discretionary fiscal policy might move the economy away from potential GDP instead of toward potential GDP is that
A)economic forecasts consistently underestimate the impact of fiscal policy.
B)it is difficult to know whether real GDP is above or below potential GDP.
C)during a recession,politicians prefer increases in government spending over decreasing taxes.
D)government programs automatically move real GDP away from potential GDP.
E)government programs are always expansionary.

Question

Quizplus · Accepted Answer

It can be difficult to accurately determine whether the economy is operating above or below potential GDP. Discretionary fiscal policy can unintentionally push the economy further from potential GDP if policymakers misjudge the state of the economy and implement policies that exacerbate any existing imbalances. For example, if policymakers implement expansionary fiscal policy when the economy is already operating at or near its potential output, it could lead to inflationary pressures and push the economy further away from potential GDP.

A Reason Why Discretionary Fiscal Policy Might Move the Economy