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Six Problems With Fiscal Policy

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Name six problems that complicate fiscal policy for policymakers. Please include examples and explanations.

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Solution Summary

Describes six problems that make the impact of fiscal policy in the real world differ from its impact in theory. Written from the U.S. point of view, but can be adapted to any parliamentary democracy.

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Fiscal policy has to do with taxes and government spending. When governments change their fiscal policies, that means they change taxes, spending, or both. One type of fiscal policy is an expansionary fiscal policy. This is fiscal policy that tends to help the economy grow faster in the short run. It involves cutting taxes, increasing spending, or both. In the aggregate supply-aggregate demand model, it causes an increase in aggregate demand. The other type of fiscal policy is contractionary fiscal policy. It tends to slow economic growth in the short run. It involves raising taxes, cutting spending, or both. This causes a decrease in aggregate demand.

1. It can take months for Congress (in the U.S.) to pass changes to fiscal policy, and more months for the changes to take effect.

In most countries, ...

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