Question

5. a) Compare and contrast the inside vs outside lags between monetary and fiscal policy

      b) What are the pros and cons on the “rule vs discretions” on the     stabilization? What is the ‘monetary rule’ proposed by Milton Friedman?

c) Use the following table to set up the ‘rules of monetary growth”

	GDP growth	inflation	nominal GDP
current (actual)	3%	4.50%	$ 2.3 trillion
target	4%	2%	$ 2.42 trillion

Answer 1

ANSWER::

Type of inside lag:>
1.Recognition lag
2. Decision lag
3. Action lag
4. Implementation lag
                   Comparison of Inside lags in Monetary and fiscal policy.
1.Recognition lag.
=> Monetary policy: The recognition lag is the period that elapses between the time a disturbance occurs and the time the policymakers recognize that action is required. It takes time to recognize that the economy has changed insuch a way as to require a change in policy.
=> fiscal policy: Recognition lag regards to fiscal policy is at the hands of the central bank which collects and interprets data pertaining to economic conditions in the country.
2. Decision lag.
=> Monetary policy: Decision lag is the time that elapses between when the need for action is recognized and when the action is in fact taken by the monetary authorities.
=> fiscal policy: This relates to the period of time that occurs when the fiscal authorities recognize the need for action and the data on which action is actually taken. Once the need for a policy change is recognized, it takes decision makers time to alter policy.
3. Action lag.
=> Monetary policy: For Monetary policy, this involves the buying and selling government securities in the open market. The action lag is usually shorter for monetary policy than fiscal policy.
=> fiscal policy: For Fiscal policy, this involves appropriating funds to government agencies(for government spending)or changing the tax code(for taxes).
4. Implementation lag
=> Monetary policy: The implementation lag is the delay between the recognition of the need for action and the policy decision. The lag between the policy decision and its implementation for monetary policy is short.
=> fiscal policy:The implementation lag might be long when compared to monetary policy.

The outside lag is the period of time that elapses between the policy change and its effect on the economy. This lag arises because individual decision makers in the economy will take time to adjust to new conditions. Let's see the comparison between monetary and fiscal policy with respect to outside lag.

=> monetry policy: financial policy will in general work by affecting speculation and the slacks in the physical procedure of building plants and overwhelming gear are without a doubt longer than the slacks in creating shopper products. Thus slack is more.

=> Financial policy: As it doesn't influence the economy legitimately, the outside slack is less. The ideal blend ought to be made by policymakers so as to bring the best strategies.

(B) k- percent rule is the monetary rule proposed by Milton Friedman. It proposes to set the money supply growth at a rate which is equal to the growth of real GDP every year.

(C) The rules of monetary growth as stated by economists are as follows.

• Steady growth in the money supply stabilizes aggregate demand only if the velocity of money is stable. But sometimes the economy experiences shocks, such as shifts in money demand, that cause veloc-
  ity to be unstable. Most economists believe that a policy rule needs to allow the
  money supply to adjust to various shocks to the economy.
• A second policy rule that economists widely advocate is nominal GDP tar-
  geting. Under this rule, the Fed announces a planned path for nominal GDP.
  If nominal GDP rises above the target, the Fed reduces money growth to
  dampen aggregate demand. If it falls below the target, the Fed raises money
  growth to stimulate aggregate demand
• A third policy rule that is often advocated is inflation targeting. Under this
  rule, the Fed would announce a target for the inflation rate (usually a low one)
  and then adjust the money supply when the actual inflation rate deviates from
  the target.