Comment on the statement: “Discretionary fiscal policy offers an ideal approach to dealing with the nation’s economic problems. It is without problems, criticisms, or complications.”

Question

What will be an ideal response?

Answer 1

Discretionary fiscal policy does offer government policymakers potential tools (changing taxes or government spending) to use for stimulating the economy during a recession or for contracting the economy during a period of high inflation. Fiscal policy, however, is not without its problems, criticisms, or complications. First, there are timing problems in getting it implemented at the right time so it will be effective. Second, there are political problems in getting it accepted because it takes time to get the actions passed through Congress and signed by the President. Third, there are expectations problems because policies may be reversed in the future. Fourth, the taxing and spending decisions of the Federal government may be partially offset by the taxing and spending decisions of state and local governments. Fifth, some economists are concerned that expansionary fiscal policy that requires the Federal government to borrow money will raise interest rates and crowd out investment spending, thus reducing the expansionary effect of the fiscal policy.