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1. Explain two of the three limitations (or problems with lags) policymakers face when engaging in...

1. Explain two of the three limitations (or problems with lags) policymakers face when engaging in Fiscal Policy:

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1. Crowding out of investment: It happens because a use of expansionary fiscal policy would raise the interest rate which crodws out private investment. A hike in interest rate means investment is expensive now.

2. Recognition Lag: It is the lag which authorities takes time to recognize the problem/ issue.

3. Decision Lag: Once the government has recoginized a problem, then they take decision what actions to take to solve the problem. They decide which policy to use and how.

4. Implementation Lag: It is the amount of time it takes a fiscal policy decisions to be implemented.

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