A limitation of using fiscal policy to manage the economy is that
Question 1 Report
A limitation of using fiscal policy to manage the economy is that
Answer Details
The correct answer is there is often a time lag between implementing the policy and its effects being felt.
Fiscal policy changes require time at multiple stages. There is a recognition lag (identifying the problem), a decision lag (debating and passing legislation), and an implementation lag (putting the policy into practice). Even after implementation, it takes further time for the spending or tax changes to work through the economy via the multiplier process. These time lags mean fiscal policy cannot deliver instant results and may even be poorly timed if economic conditions change before the effects materialise.
Fiscal policy can affect both the demand side and the supply side of the economy, so the claim that it only affects supply is wrong. It can certainly influence employment (through aggregate demand) and it does affect aggregate demand by definition.
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