ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the high cost of running a budget deficit and the needs to repay a debt that often increases due to currency depreciation
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the short implematation lag means that the policy has only one chance to work and when it doesn’t the economy slips deeper into recession and deflation
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that the public lose confidence win the government and no longer are prepared to accept spending increases which might cause inflation
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None of the above
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Detailed explanation-1: -The biggest limitation of expansionary fiscal policy is that it can cause the crowding-out effect. This occurs when the government borrows so much to fund its spending that there is a large increase in the interest rates in the economy. This leads to a fall in investment and consumption.
Detailed explanation-2: -Governments could borrow money and increase spending as part of a targeted fiscal policy. An expansionary fiscal policy leads to higher budget deficits while a contractionary policy reduces deficits.
Detailed explanation-3: -It is implemented to discourage savings and increase consumer spending. Such low or negative rates are aimed at increasing inflation as it promotes increased spending and lower savings.
Detailed explanation-4: -However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects.