Question

Government's efforts to stabilize the business cycle through fiscal policy can destabilize the economy due to the presence of:

		lags in the process of crafting a budget appropriate to the circumstances.
		a negative interaction between fiscal and monetary policy due to the multiplier effect.
		a tendency of prices to change faster than the interest rate.
		business cycles that are closely synchronized to the political cycle.

Answer 1

Answer: 1^st option

Making an appropriate budget suitable for the cycle is difficult and this lag makes the economy destabilized.

There are four cycles – expansion, peak, recession, and trough.

Fiscal policy is the policy of the government of controlling tax rates, and/or controlling government spending.

Suppose government wants to control tax rates for stabilizing the economy; but, finding the appropriate tax rates may be difficult.