Question

One of the shortcomings of monetary policy is the problem with timelags. This is a problem because:

Non banks can make loans as well as member banks over time

It takes time for the US senate to approve the FED changes

It takes time for the FED to get approval of it’s actions from the US President

After the FED takes an action it may take years for the discount rate and Fed funds rate to change

After the FED takes an action it could be months or even years before the changes impacted our macroeconomic economy

Answer 1

The correct option is e.

a) Time lag is the time between when an economic action was taken and when it showed its consequences. More banks making loans with time is not related to time lag problem of monetary policy.

b) Time lag problem actually starts when the action has been taken. This means it starts when the US senate has already approved the action.

c) Problem of time lag with monetary policy starts when the policy has come into effect already. It doesn't start before the policy gets approved.

d) The discount rates change immediately after the FED takes action but it might take time for this changed rate to show impact in the economy working.

e) It is not necessary that the actions taken by FED will start showing its results in the economy immediately. It might take months or even years to show results in the working of the economy. Like if FED changes interest rates, it might take time upto 18 months to show effect in the economy.