Fiscal policy impacts the economy in the short and long run by influencing various macroeconomic variables. It interacts with monetary policy and has limits due to factors like coordination and crowding out effects.
Fiscal policy is a powerful tool used by governments to influence the economy by making decisions on taxation and spending. It impacts various macroeconomic variables in both the short and long run, such as real GDP, interest rates, and unemployment rates.
One key aspect to consider is the interaction between fiscal policy and monetary policy, where fiscal policy aims to influence aggregate output, while monetary policy focuses on controlling interest and inflation rates. These policies can interact to affect output and interest rates in the economy.
While fiscal policy can be effective, there are limits due to factors like coordination with monetary policy, potential crowding out effects on private investment, and the implementation lag associated with fiscal policy changes.
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