Two Drawbacks in Using Fiscal Policy as a Stabilization Tool

question 62

Multiple Choice

Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy can affect ________ as well as aggregate demand and that 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

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Definitions:

Expected Inflation

The rate at which consumers, businesses, and investors expect prices to rise over a future period.

Long-run Phillips Curve

The long-run Phillips Curve is an economic concept that illustrates the relationship between inflation and unemployment, suggesting that in the long run there is no trade-off between these two factors.

Potential Output

The upper limit of real GDP sustainable over an extended period without inflating the inflation rate.

Phillips Curve

A graphical representation showing an inverse relationship between the rate of unemployment and the rate of inflation in an economy.