Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects ______ as well as aggregate demand and fiscal policy is _______.
A) consumption; too flexible
B) potential output; not flexible enough
C) consumption; offset by automatic stabilizers
D) potential output; offset by automatic stabilizers

Question

Quizplus · Accepted Answer

Fiscal policy not only affects aggregate demand but also potential output, meaning that it can have unintended consequences for long-term economic growth if used excessively or improperly. Additionally, fiscal policy is often not flexible enough to respond quickly to economic changes, which can make it less effective as a stabilization tool compared to other policies such as monetary policy.

Two Drawbacks in Using Fiscal Policy as a Stabilization Tool