Final answer:
Fiscal policy addresses short-run economic fluctuations through countercyclical measures: expansionary policy during recessions to boost demand, and contractionary policy during growth to prevent overheating. Temporary policies are less effective than permanent ones, and political challenges can impede policy implementation.
Step-by-step explanation:
Fiscal policy can counteract short-run economic fluctuations through countercyclical fiscal policies. This involves implementing an expansionary fiscal policy during economic downturns by increasing government spending and decreasing taxes to stimulate demand. Conversely, during periods of economic growth, a contractionary fiscal policy is applied, which includes decreasing government spending and increasing taxes to cool down the economy and avoid overheating. However, the effectiveness of these policies can be diminished if they are perceived as temporary rather than permanent, as they may impact expectations and behaviors differently.
Political realities often complicate the implementation of countercyclical fiscal policies. Politicians may find it counterintuitive to increase spending during recessions or to restrain spending during booms, despite these actions potentially stabilizing the economy. Moreover, proposals for balanced budgets and restrictions on borrowing can limit the government's ability to enact effective fiscal policy. Thus, countercyclical fiscal policy can be a useful tool for managing the economy, but structural change and political will are necessary for its success.