Q. 13.3 List and define fiscal policy ti... [FREE SOLUTION]

Chapter 13: Q. 13.3 (page 281)

List and define fiscal policy time lags and explain why they complicate efforts to engage in fiscal "fine tuning".

Short Answer

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After the variability is identified, Congress needs to discuss, discuss, pass the bill, and sign it. This delays the operational impact of the policy. Therefore, delays affect the implementation of fiscal policy.

Step by step solution

Step 1- Introduction

There is a time lag between a given measure and its effect, and the length of this time determines how effective fiscal policy is.

Step 2- Explanation

The maximum delay is

Detection Delay This is the interval between when an action is needed and when it is detected. If you have enough predictive tools and techniques, you can reduce this.
Management delay interval between the need for an action and the execution of the actual action. It is the most difficult delay to manage and can last from 1 to 15 months. To reduce this delay, we need to prepare public works and significantly reduce bureaucracy.
Operational lag Interval between when action is taken and when it has an impact on the economy, income and employment.

Step 3- Conclusion

Due to the short inside lag in monetary policy but the short outside lag in fiscal policy, delays make implementation and policy making very difficult. This means that parliament and government agencies take a long time to formulate appropriate policies, but once implemented, people take a short time to respond. The detection lag reviews historical data that primarily describes past events, so in retrospect, analysis and review of this data can take weeks to detect business cycle fluctuations.