In general, the most likely way for expansionary fiscal
policy to destabilize an economy is for this fiscal policy to "overheat the economy."
This would happen if expansionary fiscal policy is undertaken at a time when the economy
is already expanding well enough on its own.
If an economy
is at the classical range of the AS curve, expansionary fiscal policy will serve only to
fuel inflation. This is true because the tax cuts or spending increases will move the
AD curve to the right. In such a case, this policy could destabilize the economy by
causing demand pull inflation.
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