What fiscal policy is most likely to be invoked during a period of recession and high unemployment? A period of rapid inflation? What political, investment, and international problems might the U.S. Congress encounter in enacting these policies and putting them into effect?

Question

What will be an ideal response?

Answer 1

During recession and high unemployment, the government would most likely initiate an expansionary fiscal policy. A contraction fiscal policy would most likely be called for during a period of rapid inflation, especially if it seems to be demand-pull inflation.
Several problems are likely to arise in enacting either of these policies. Timing lags in recognition, implementation, and impact are one concern. Another has to do with political realities. A contraction policy has many unpopular aspects to it because it calls for raising taxes and for cutting government spending. There are also unique problems associated with expansionary policy: crowding out is one potential result that would reduce the expansionary effect of the policy.