Effectiveness of Fiscal Policy
Demand Management (Fiscal Policy)
Syllabus requirement
Includes strengths (targeted spending, deep recession effectiveness) and limitations (crowding out, debt sustainability, political constraints, time lags).
Summary
This topic evaluates how well fiscal policy achieves macroeconomic goals such as economic growth, stable inflation and low unemployment, by examining practical constraints on government spending and taxation. Key limitations include political pressures, various time lags, the sustainability of public debt, and (for HL) the crowding-out effect, all of which reduce how effectively fiscal policy can change aggregate demand and real activity.
Real-world examples for this unit

U.S. COVID-19 Fiscal Relief Response

Japan's 2025 Economic Package: Expansionary Fiscal Policy

Romania's 2025–26 Fiscal Consolidation: Contractionary Fiscal Policy

Germany's €500bn Infrastructure Fund: Fiscal Policy and Long-Run Growth