A problem that makes fiscal policy less effective is that:
A) fiscal policy must be offset by monetary policy.
B) government spending is a relatively small portion of GDP.
C) government spending does not directly affect aggregate demand.
D) higher taxes or increased borrowing to fund government spending can reduce aggregate demand.

Question

Quizplus · Accepted Answer

Higher taxes or increased borrowing to fund government spending can indeed reduce aggregate demand. This is because higher taxes reduce disposable income for consumers, potentially decreasing consumption. Increased borrowing can lead to higher interest rates, which can dampen investment spending. Both of these effects can counteract the stimulative impact of government spending, making fiscal policy less effective.

A Problem That Makes Fiscal Policy Less Effective Is That