Which of the following statements is true?
A)In the short run, changes in fiscal policy mainly affect potential GDP.
B)Fiscal policy's initial impact on real GDP is permanent.
C)Fiscal policy does not have the potential to reduce the size of economic fluctuations.
D)Erratic changes in fiscal policy can increase economic fluctuations.
E)Fiscal policy cannot cause erratic fluctuations in real GDP.

Question

Quizplus · Accepted Answer

Erratic changes in fiscal policy, such as sudden increases or decreases in government spending or changes in tax policies, can lead to increased economic fluctuations. This is because households and businesses may not be able to adjust their behavior quickly enough to adapt to these policy changes, leading to volatile changes in output, employment, and prices. In contrast, more gradual changes in fiscal policy may be less disruptive and have more predictable effects on the economy over the long run.

Which of the Following Statements Is True