Question

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for A) supply-side policy. B) nonactivists. C) activists. D) demand-management policy.

Answer 1

The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for nonactivists

There are five time lags that prevent an activist policy from returning aggregate output to full employment instantaneously

1. The data lag is the time it takes for policymakers to obtain the data that tell them what is happening to the economy,

2. The recognition lag is the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy.

3. The legislative lag represents the time it takes to pass legislation to implement a particular (fiscal) policy

4. The implementation lag is the time it takes for policymakers to change policy instruments once they have decided on a new policy.

5. The effectiveness lag is the time that it takes for an activist policy to actually influence economic activity. The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for nonactivist policy.