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There is a time lag in recognising that government intervention is needed to affect the level of economic activity.
There is a time delay between recognising the need for fiscal policy intervention and actually implementing appropriate action.
There is a time lag between implementing fiscal policy and seeing the actual effects on the economy.
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’.
Economics notes on
Limitations of fiscal policy
Perfect for A level, GCSEs and O levels!
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