Question

What causes the lags in the effect of monetary and fiscal policies on aggregate demand? What are the implications of these lags for the debate over active versus passive policy?

Answer 1

Answer:-

There are two powerful tools used in running the economy in the right direction: these are monetary and fiscal policy. If both of these tools are used efficiently, they can generate powerful results. Lags in monetary and fiscal policy could be attributed to the fact that people set their goals in advance which creates changes in interest rate and aggregate demand of goods and services. Lags in Monetary and fiscal policy could be used to forecast the economic fluctuations and the policy makers can devise a policy to clear out any lope holes. The implications of these lags is that when policy is implemented it takes time to run through the government systems to stabilize the economy. The new policies that are implemented may have unseen results that can go in opposite direction and with the nature of economics that is, it will eventually take it to new equilibrium.

Households and firms create there spending plans before everything to take time for the change in interest rates. This will then alter aggregate spending. Policy makers also take some time to see that a problem is in order policy take time to be made and put into works and it takes time for multiplier effects to happen. Though the economy doesn’t respond right away to changes in a policy, activist stabilization policy is hard to time correctly.