Explain four reasons why it is difficult to use discretionary fiscal policy to eliminate a deflationary or inflationary ga

Question

What will be an ideal response?

Answer 1

Three limitations of using discretionary fiscal policy are the law-making lag (the point that the policy making process is slow), the shrinking area of law-maker discretion (the point that an increasingly large part of the budget is effectively off limits to change), the difficulty in determining potential GDP at any given time (the point that at times it is difficult to know if the economy is in a recession or an expansion), and the difficulty in forecasting real GDP (the point that the proper policy depends on where real GDP is relative to potential GDP in the future when the policy is actually implemented).