Fiscal Policy Limitations
What are the Limitations of Fiscal Policy?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What are the Limitations of Fiscal Policy?
Fiscal policy can help an economy that is producing below its potential GDP to expand aggregate demand so that it produces closer to potential GDP, thus lowering unemployment. However, fiscal policy cannot help an economy produce at an output level above potential GDP without causing inflation At this point, unemployment becomes so low that workers become scarce and wages rise rapidly.
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