Question

Fine tuning the economy with fiscal policy is:

A. relatively simple because the government has access to the best information available.
B. difficult because the government lacks important information about the economy.
C. relatively simple because the political process usually works smoothly and without significant lags.
D. difficult because economists have not developed any theoretical models of the macroeconomy.

Answer 1

Fine-tuning the economy using fiscal policy is challenging due to the time it takes to identify economic downturns, enact policies, and the subsequent implementation lags. Additionally, these delays can make fiscal measures counter-productive by the time they're in effect, exacerbating economic cycles.

Step-by-step explanation:

Fine-tuning the economy with fiscal policy is difficult because there are long and variable time lags involved in the process. When the economy begins to slow down, it already takes months for statisticians to provide economic data that confirms whether a recession is happening, which is known as the recognition lag.

Once a downturn is recognized, enacting fiscal policy involves further delays due to the political process (legislative lag), and even after a policy is enacted, dispersing the funds and implementing programs takes additional time (implementation lag). Moreover, by the time policies take effect, the economy's situation might have changed, leading to policy measures that may exacerbate economic cycles rather than stabilize them.