Question

Q19

Time lags in expansionary monetary policy can cause

Question 19 options:

	short-term monetary policy to work more effectively than long-term targeting.
	difficulty in the timing of appropriate policy and can even lead to destabilization.
	an undesirable inflationary gap if there is an unexpected increase in exports.
	monetary expansions to work very quickly but cause monetary contractions to work very slowly.
	Both (B) and (C).

Answer 1

The central bank takes expansionary or contractionary monetary policy to stabilize the economy in the time of business fluctuations, such as expansion or recession. the expansionary monetary policy increases aggregate demand in the economy and often taken at the time of recession. These policies are, however, subject to time lags. This lags often increases the time between the policy taken and its effect to be felt in the economy. Thus, some economists argue that the time lag associated with the monetary policy can destabilize the economy instead of stabilizing it.

Given the options:

• The monetary policy is changed in short intervals, and all of them a subject of a long implementation gap. That is it takes time for the policy to change the real variables in the economy. This is for short term and long term targeting alike.
• Monetary policy is subject to long outside or response lag. This lag often takes time and can even start to affect the economy when it already self-healed towards long-run equilibrium. At this point, the inappropriate policy can increase aggregate demand above full employment and push the economy in the inflationary gap.
• The monetary policy coupled with changes in any component of aggregate demand such as export can increase aggregate demand above the desired level and push the economy to the inflationary gap.
• Monetary expansion does not work quickly, this is subject to long outside gap.
• Both (B) and (C) are the possible causes of monetary policy.

Therefore, the correct answer is: Both B and C