Discretionary fiscal policy is far from perfect because there are often significant and unpredictable time lags involved, and the magnitude of a particular policy tool on GDP is often difficult to predict because of multipliers. Having said this, time lags and multipliers have been observed over time and are fairly well understood even if not always perfectly predictable. Time lags refer to the fact that discretionary fiscal policy tools used by governments take time to generate the targeted counter-cyclical results. Multiplies mean that the amount of fiscal stimulus needs to be carefully calibrated in terms of the targeted effect.
Key learning objectives:
Explain time lags, as well as how and why time lags can affect the implementation of discretionary fiscal policy
Explain how multipliers can affect the potency of discretionary fiscal policy