Question

Identifying time lags Advocates of active policy face several obstacles when implementing discretionary fiscal or monetary policy, such as identifying the economy's potential output level, the natural rate of unemployment, and the effects of a passive approach. Policymakers must also cope with a multitude of time lags that complicate the implementation of active policy. Identify the type of time lag illustrated in the following scenario:

Policymakers believe that the economy is experiencing a recession, and they have agreed on the need for expansionary monetary policy. However, some economists suggest dropping the federal funds rate by 0.25%, while others think it needs to be decreased by 0.75%.

a. Effectiveness lag
b. Recognition lag
c. Implementation lag
d. Decision-making lag

Answer 1

Answer: d. Decision-making lag

Step-by-step explanation:

When policy makers have identified that there is a problem that needs fixing but cannot seem to agree on the way forward, this is known as a Decision - Making Lag or simply the Decision Lag. It is one of the 3 specific inside Policy Lags and can be devastating due to the uncertainty of time it might take.

For instance, the economists suggesting dropping the federal funds rate by 0.25% might have the backing of one half of the Fed and the other Economists, the other half. Arguments could therefore go on for weeks before a decision is made.