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Chapter 13: Q.21 (page 298)

A government has found that 2 months elapse before it can identify a problem to address with policy action. It has been found that 1 month is required to determine the appropriate policy action. Finally, it has been concluded that the total time required between the initial presence of the problem and the effects of a policy action to be realized is 12 months. What are the remaining policy time lag and its duration?

Short Answer

Expert verified

the remaining policy time lag is effectiveness lag and its duration is nine months.

Step by step solution

01

introduction

Recognition lag alludes to the time it takes an administration to detect an issue that needs an arrangement activity.

Implementation lag alludes to the time it takes an administration to figure out a reasonable approach to tackle the front and centre issue.

Effectiveness lag alludes to the time a monetary approach takes to achieve the ideal result

02

explanation

The public authority requires a month to think of a fitting arrangement to tackle the issue.

Hence, the implementation lag = 1month.

12months pass from the time the issue is perceived to the time the impacts of the picked arrangement are felt. It implies that the three lags are spread over a time of the year

Total time elapsed = recognition lag + implementation lag + effectiveness lag.

calculating the remaining lag and its duration

12months = 2month + 1month + effectiveness lag.

Thus, effectiveness lag = 12-3= 9

Hence the duration is 9months.

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Most popular questions from this chapter

Currently, a government's budget is balanced. The marginal propensity to consume is \(0.80. The government has determined that each additional \)10 billion it borrows to finance a budget deficit pushes up the market interest rate by role="math" localid="1651613391961" 0.1 percentage point. It has also determined that every role="math" localid="1651613378175" 0.1-percentage point change in the market interest rate generates a change in planned investment expenditures equal to \(2 billion. Finally, the government knows that to close a recessionary gap and take into account the resulting change in the price level, it must generate a net rightward shift in the aggregate demand curve equal to \)200 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase its expenditures? (Hint: How much private investment spending will each $10 billion increase in government spending crowd out?)

Explain how time lags in discretionary fiscal policy making could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these time lags could actually cause the discretionary fiscal policy to destabilize real GDP?

Assume that MPC = 45when answering the following questions.

a. If government expenditures rise by \( 1 billion, by how much will the aggregate expenditure curve shift upward?

b. If taxes rise by \) 1 billion, by how much will the aggregate expenditure curve shift downward?

c. If both taxes and government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift? What will happen to the equilibrium level of real GDP?

d. How does your response to the second question in part (c) change if MPC = 34? If MPC =12?

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?

Suppose that Congress and the president decide that the nation's economic performance is weakening and that the government should "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs.

a. Prior to the congressional and presidential action, careful studies by government economists indicated that the Keynesian multiplier effect of a rise in government expenditures on equilibrium real GDP per year is equal to 3. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. What factors might account for this?

b. Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply, Provide a possible explanation for this outcome.
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