Question

Which statement best describes the Federal Reserve timeframe for monetary policy implementation and observable policy effect?

short implementation time with a long lag before observation of effectiveness

long implementation time with a short lag before observation of effectiveness

short implementation time with a short lag before observation of effectiveness

long implementation time with a long lag before observation of effectiveness

short implementation time with a no lag before observation of effectiveness

long implementation time with a no lag before observation of effectiveness

Answer 1

Every government policy to stabilize the economy has some policy lag between proposal of the policy and its observed effect. The monetary policy is subject to various lags such as inside lag which consists of recognition lag, action lag, and implementation lag. Also outside lag such as effect lag. Now for monetary policy, the inside lag is short, because monetary authority takes quick action to any changes in the economy, but the outside lag for monetary policy is long. The effect of change in the interest rate on consumption, investment and aggregate demand takes a long time to be observed.

Therefore, given the choices:

• Monetary policy does have a short implementation time and long effect lag.
• Monetary policy does not have a long implementation time and short effect lag.
• Monetary policy does have a short implementation time but does not have a short effect lag.
• Monetary policy does not have a long implementation time and but does have a long effect lag.
• Every policy has some lag between observed effectiveness.
• Monetary policy does not have a long implementation time.

Therefore, the correct option is:

short implementation time ........ the observation of the effectiveness (1st one)