Discretionary fiscal policy

During recession, government increase spending and/or reduce taxes to stimulate aggregate demand.

During inflation, government reduce spending and/or increase taxes to restrain aggregate demand.

Limitations of discretionary fiscal policy

• Recognition lag - the time difference between the need for a fiscal policy shift and when policy makers recognize it
• Administrative lag - the time difference between recognition of the need and when the policy shift is implemented
• Impact lag - the time difference between implementation of the policy shift and its impact on the economy