Question

Compare and contrast the time lag of fiscal and monetary policies. Alternative perspectives on stabilization policy, passive vs active, conservative vs liberal, rule vs discretion.

Taylor’s rule on monetary policy, i.e.

nominal federal fund rate = inflation rate + 2% + ½ (inflation rate minus 2%) + ½ (GDP gap).

Answer 1

Time lag is referred to the time gap between a Economic action and consequence

Fiscal policy: The main advantage of fiscal policy is the short time lag. The taxation policies mainly constitute of the fiscal policy.

Monetary policy: The regulation of money supply to curb inflation Chiefly consists of the monetary policy. One of the main disadvantages of monetary policy is that they have a considerable time lag. Despite being implemented quickly, the macro effects of the monetary policy might take a lot of time to take place in the economy.

For detailed intuition in alternative effects of stabilization policy, passive vs active and rule vs discretion, I refer you take a gander at the "Alternative Perspectives on Stabilization Policy - ASE" available online. It shreds light on the concepts I've mentioned.

Now let's analyze the difference between conservatives and liberals in an economic purview.

Factor	Conservatives	Liberals
Sources of economic instability	Favor free markets, so they sternly feel that government intervention is the main cause for economic instability, thanks to the government's sporadic policy changes.	Liberals on the other hand feel that a combination of the free markets and private players in the market by creating economic booms and busts in the economy.
Rules vs discretion in economic policies	conservatives are skeptical about government's ability to gather relevant economic data in time and use them in implementing appropriate discretionary policies but prefer automatic policy rules, such as balanced budgets, fixed money supply growth rates, flexible exchange rates, and market-determined incomes	In a contrasting opinion, liberals reject all automatic policy rules, because they consider modern economies vulnerable to a host of random shocks, such as wars, commodity price movements, and disruptive technological advances.
Fiscal policy vs monetary policy	Conservatives generally favor monetary policy as a stabilization tool, as they consider fiscal actions to be synonymous with spending on wasteful social programs, budget deficits, government borrowings, higher interest rates, and the crowding out of useful private investment	On the other hand, liberals consider monetary policy too slow and weak to address sudden and drastic declines in aggregate demand in the economy
Inflation causes	according to conservatives, inflation is always and everywhere caused due to excessive monetary expansion, or in simple, by too much money chasing too few goods	Liberals reject this model by stating that the conservatives claims holds true only with third world countries which print excess money, and result in inflation.

Taylor's rule on monetary policy:

The Taylor Rule suggests that the Federal Reserve should raise rates when inflation is above target, that is, when gross domestic product (GDP) growth is too high and above potential. Also Taylor's rule suggests that the Fed should lower rates when inflation is below the target level , that is, when GDP growth is too slow and below potential.

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