Question

According to most economists, fiscal policy is:

A) effective only when potential output is perfectly known.
B) least useful in a serious economic crisis.
C) always ineffective because of crowding out.
D) not an effective tool for fine tuning the economy.

Answer 1

Most economists believe fiscal policy is not an effective tool for fine tuning the economy due to issues like crowding out effects, time lags, and the potential to worsen economic cycles.

Step-by-step explanation:

According to most economists, fiscal policy is not an effective tool for fine tuning the economy (option D). Active use of fiscal policy can be challenging due to issues like the crowding out effect, where expansionary policies can lead to higher interest rates, dissuading private borrowing and spending. Additionally, time lags in implementation, legislation, and recognition of economic conditions may render fiscal action untimely, causing it to exacerbate rather than smooth out economic cycles. Therefore, while fiscal policy can be beneficial in situations where the economy is producing below its potential GDP to lower unemployment, it is often viewed as too blunt of an instrument to be used for precise economic adjustments.