Why does the recognition lag influence fiscal policy effectiveness? Because it takes time to collect data on the current state of the economy. Because it takes time to evaluate differences between states of the economy. Because it takes time to agree on a resolution. lower GDP levels. increase the natural rate of unemployment.
After the 1970’s stagflation, Keynesian economists now understand that when it comes to aggregate supply, policy responses in that type of economic scenario: were more successful when using a contractionary monetary or fiscal policy. were more successful when using a expansionary monetary or fiscal policy.
________ will often cause monetary policy to be considered counterproductive because it makes it hard for the central bank to know when the policy will take effect.
This creates a moral hazard problem. Why does a legislative lag influence fiscal policy effectiveness? Because it takes time for Congress to pass a bill.
Time lags can make policy decisions more difficult. It is estimated interest rate changes take up to 18 months to have the full effect. This means monetary policy needs to try and predict the state of the economy for up to 18 months ahead, but this can be difficult in practise.
Effectiveness lag is the amount of time it takes for a fiscal or monetary policy's effects to produce the desired result. Once a problem is recognized and a policy is created, it must be implemented. After that, it still takes a certain amount of time for it to work. That's the effectiveness lag.
The three specific inside lags are recognition lag, decision lag, and implementation lag. The one specific outside lag is termed impact lag. Policy lags can reduce the effectiveness of business-cycle stabilization policies and can even destabilize the economy.
Recognition lag is the time delay between when an economic shock, such as a sudden boom or bust, occurs and when economists, central bankers, and the government realized that it has occurred.
Implementation lag can result from delays in recognizing a problem; disagreements and bargaining over the appropriate response; physical, technical, and administrative constraints on the actual execution of new policy; and structural economic lags as the policy change works its way through the economy.
The inside lag is the time it takes for policymakers to recognize that a shock has hit the economy and to put the appropriate policies into effect. Once a policy is in place, the outside lag is the amount of time it takes for the policy action to influence the economy.
Why does recognition lag occur? economy does not move smoothly through the business cycle. The delay/ lag time between recognizing the need for fiscal action and the time action is taken. A lag also occurs between the time fiscal action is taken and the time that action affects output, employment or the price level.
Other factors affecting how effective fiscal policy is include the time lag between the implementation of a new policy and the realization of effects of that policy, the effects policy changes have on interest rates and other economic concerns, and the actual quality of the policy change.