Question

Which of the following time lags creates the biggest problem for fiscal policy?

a. impact lag

b. recognition lag

c. data lag

d. legislative lag

Which of the following time lags creates the biggest problem for monetary policy?

a. impact lag

b.legislative lag

c. recognition lag

d. effectiveness lag

Answer 1

Response lag, also known as impact lag, is the time it takes for corrective monetary and fiscal policies, designed to smooth out the economic cycle or respond to an adverse economic event, to affect the economy once they have been implemented.

Recognition lag is the time lag between when an actual economic shock, such as sudden boom or bust occurs, and when it is recognized by economists, central bankers and the government.

In economics, the inside lag (or inside recognition and decision lag) is the amount of time it takes for a government or a central bank to respond to a shock in the economy.

data lag is the time taken by the government to collect data to apply a monetary or fiscal policy.

For fiscal policy, Congress would need to propose an appropriate fiscal policy bill. Economists refer to the time it takes to pass a bill as the legislative lag.

effectiveness lag is the amount of time it takes for a fiscal or monetary policy's effects to produce the desired result. Even after a policy is implemented, it still takes time for it to work.

for FISCAL POLICY the biggest problem is LEGISLATIVE lag. this is because the government takes alot of time to take decisions that are best for the economy. it has to be careful before making any changes in the fiscal policy as they can affect economy adversely and they will be held solely responsible for it.

for MONETARY policy the biggest problem is EFFECTIVENESS lag. when a monetary policy takes place it takes time to produce desired results because the expected changes take time to spread in the economy. it takes time for money supply or interest rate changes to get to desired results.

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