Which of the following is a possible limitation of fiscal policy?

• A. Fiscal policy decisions are unaffected by political considerations
• B. Time lags in policy implementation
• C. Immediate and predictable effects on aggregate demand
• D. Fiscal policy always leads to lower inflation

Answer: (B)

Verified step by step guidance

1. Step 1: Understand what fiscal policy entails. Fiscal policy involves government decisions on taxation and spending to influence the economy, particularly aggregate demand, employment, and inflation.
2. Step 2: Identify common limitations of fiscal policy. These often include time lags in recognizing economic problems, delays in implementing policy changes, and the time it takes for these changes to affect the economy.
3. Step 3: Analyze each option given in the problem. For example, 'Fiscal policy decisions are unaffected by political considerations' is generally false because political factors often influence fiscal decisions.
4. Step 4: Recognize that 'Time lags in policy implementation' is a well-known limitation because it takes time to detect economic issues, pass legislation, and for the policy to impact the economy.
5. Step 5: Conclude that options like 'Immediate and predictable effects on aggregate demand' and 'Fiscal policy always leads to lower inflation' are not accurate limitations, as fiscal policy effects are neither always immediate nor guaranteed to reduce inflation.