Six Key Assumptions Underlie Models of Fiscal Policy

question 106

Essay

Six key assumptions underlie models of fiscal policy.All of them are likely to be violated in the context of real world macroeconomic problems.Explain how any three of the following assumptions are likely to fail in the real world.
(a)Financing the deficit doesn't have any offsetting effects.
(b)The government knows what the current situation is.
(c)The government knows the economy's potential income level.
(d)The government has great flexibility in changing spending and taxes.
(e)The size of the government debt doesn't matter.
(f)Fiscal policy doesn't negatively affect other government goals.

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Definitions:

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