Question

Label the scenarios with the type of monetary policy lag represented in each.

Despite numerous data trends suggesting a recession, the FOMC waits until their monthly scheduled meeting to change the direction of current monetary policy.

Significant revisions to quarterly GDP data and monthly unemployment data delay the identification of the start of a recession.

Data on GDP is released quarterly, meaning that an economic downturn beginning in January may not be identified until more than three months later.

Once the Federal Reserve lowers interest rates, businesses and consumers are slow to increase borrowing as a result.

WORK BANK
implementation lag
recognition lag
information lag
decision lag

Answer 1

1) Decision lag

2) Recognition Lag

3) Information Lag

4) Implementation Lag

Step-by-step explanation:

The decision lag represents the lag time between the recognition of a problem and the decisions of how best to respond. Monetary policy has a smaller decision lag than fiscal policy, as monetary policy can be implemented immediately following an FOMC meeting.

The recognition lag refers to the time it takes the Fed to get an accurate picture of economic conditions. The Fed must be sure data is accurate and is also showing a consistent trend before taking action.

The information lag describes the lag between a change in economic conditions and these changes being available in economic data reports. Data is often published monthly or quarterly, creating a lag in the discovery of changes in the economy.

The implementation lag refers to the final lag in the monetary policy process. Once the Fed has changed interest rates, it takes time for businesses and consumers to respond to these changed incentives for borrowing.