problems with fiscal policy in practice

Cards (1)

  • Governments don't know where exactly economy is in business cycle, may boost aggregate demand as the economy is expanding anyways. government doesn't know size of fiscal multiplier effect and how quickly it will, don't know how much crowding effects may occur. In open economy may lead to serious worsening of current account deficit. May lead to rise in inflation rates by boosting aggregate demand instead of output. In practical policy cannot be easily changed as budgets are set annually and well in advance