Fiscal policy

Question

In view of your answers, describe the following statement:  “Although fiscal policy obviously is useful in combating the extremes of severe recession and demand-pull inflation, this is impossible to employ fiscal policy to fine-tune the economy to the full-employment, non-inflationary level of real GDP and keep the economy there indefinitely.”

 

Answer 1

As recommended, the other answers help describe the quote. Whereas fiscal policy is useful in combating the extremes of severe recession along with its built-in “safety nets” and stabilization tools, and whereas the built-in stabilizers can also dampen spending throughout inflationary periods, this is undoubtedly not possible to hold the economy at its full-employment, non-inflationary level of real GDP indefinitely. There is the difficulty of timing. Each period is distinct, and the impact of fiscal policy will influence the economy differently based on the timing of the policy and the severity of the condition.  Fiscal policy operates in a political environment wherein the unpopularity of higher taxes and specific cuts in spending might dictate that the most suitable economic policies are avoided for political reasons. At last, there are offsetting decisions which may be made at any time in the private and/or international sectors. For instance, efforts to revive the economy along with more government spending could result in dropped private investment or lower net export levels.

       Even if it were probable to do any fine tuning to obtain the economy to its ideal level in the first place, this would be virtually impossible to design a continuing fiscal policy which would keep it there, for all of the cause mentioned above.