Macroeconomics › Section Q · Government budgets and fiscal policy › Topic Q.6
Practical problems with discretionary fiscal policy
On an AD/AS diagram, fiscal policy simply slides aggregate demand to potential GDP. In the real world it has to fight interest-rate effects, long delays, uncertainty and politics, which is why many economists see it as a blunt tool best saved for severe downturns.
In this topic
- From confidence to doubt
- Interest rates and crowding out
- Fiscal and monetary policy together
- Three time lags
- Worked example: adding up the lags
- How big is the gap, and how big the effect?
- Temporary versus permanent changes
- Worked example: a temporary or a permanent tax cut
- Structural change and the limits of demand
- Political realities
- Common mistakes to avoid
- Key takeaways
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