Question

Which of the following is a common criticism of the use of fiscal policy?

If no fiscal policy is used, the economy will never be able to correct itself, even partially.

A government borrowing money to finance fiscal policy can crowd out investments.

Expansionary fiscal policy can help pull an economy out of a recession.

Fiscal policy is often enacted too quickly, before the market is ready for it.

Answer 1

A government borrowing money to finance fiscal policy can crowd out investments.

Expansionary fiscal policy requires either a cutting taxes or an increase in government spending. Increasing government spending requires the government to borrow additional funds. This increase in demand for loans results in a rising interest rate, which then limits the ability of private investors to borrow funds.