Question

Explain how time lags in discretionary fiscal policy making could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these time lags could actually cause the discretionary fiscal policy to destabilize real GDP?

Short answer

As a result, policymakers may push real GDP higher than anticipated, causing real GDP to become less stable.

Step-by-step solution

Introduction 

The given is the discretionary fiscal policymaking in the face of an economic downturn

The objective is to determine is it possible for this policy to destabilize real GDP

Explanation 

The president's and Congress's efforts to stabilize real GDP in the midst of an economic crisis could be thwarted by time lags in discretionary fiscal decisions.

The reason for this is that precise time recognition and information collecting are required in order to implement fiscal policy. As a result, the delay in acquiring information may cause the congress and the president to delay taking fiscal action.

As you may be aware, policy acts take time to manifest their full economic impact. As a result, if these time lags are very long, the likelihood of a downturn showing its effects by the time fiscal action is enacted increases.

As a result, authorities may push real GDP higher than intended in order to destabilize real GDP.