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Recognition lags

There is a time lag in recognising that government intervention is needed to affect the level of economic activity.

Administrative lags

There is a time delay between recognising the need for fiscal policy intervention and actually implementing appropriate action.

Impact lags

There is a time lag between implementing fiscal policy and seeing the actual effects on the economy.

Crowding out

It is suggested that fiscal policy can lead to ‘financial crowding out’, whereby government borrowing leads to a fall in private investment.

This occurs because increased borrowing leads to higher interest rates by creating a greater demand for money and loanable funds and hence a higher ‘price’.

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Limitations of fiscal policy

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