Fiscal policy may not work as policymakers intend it to work because of

Question

Quizplus · Accepted Answer

Fiscal policy can be limited by both crowding out and lags. Crowding out occurs when increased government spending results in higher interest rates, which reduces private investment and consumption. This can limit the effectiveness of fiscal policy. Lags refer to the time it takes for a fiscal policy to affect the economy. There can be implementation lags, where it takes time for policymakers to pass and enact legislation, and effectiveness lags, where it takes time for the policy to actually have an impact on the economy. The physical production possibilities frontier is not directly related to the effectiveness of fiscal policy.

Fiscal Policy May Not Work as Policymakers Intend It to Work