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Thursday, 12 January 2012

Discretionary Fiscal Policy

Using fiscal policy in response to economic conditions, e.g. a recession, to induce changes in the economy. Some economists say that discretionary fiscal policy can be a good way to reduce the volatility of business cycles. For example if economic growth is slowing and forecasters predict that a down turn/recession may occur by the next year, expansionary fiscal policy may be used to reduce the impact. However, forecasters' predictions do not always come true, thus giving the case against using discretionary. Also, effects of fiscal policy do not show immediately due to the time lag, thus there is danger of in fact worsening the economic situation than improving it.