Question

Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy.

Answer 1

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Accurately timing fiscal policy may be more difficult to accomplish thanaccurately timing monetary policy for two reasons. First, the time it takes to cometo a decision is much longer for fiscal policy because the decision-making body islarge and diverse. The president and a majority of Congress have to agree uponfiscal policy changes. Comparatively, the body that decides monetary policy is the Open Market Committee, which has 12 members. The smaller group has theability to come to decisions more quickly.

Second, it can take longer to implement fiscal policy relative to monetarypolicy. If the fiscal policy change is a government purchase, it takes time to plan the purchase, bid the purchase, and to begin implementing the project. Monetarypolicy begins implementation with a directive to the trading desk to buy or sell Treasury securities