Lesson 04 Practice Questions.docx - Question 1 Not yet graded 0 pts According to the cruise ship example what are the three policy lags and how do they

Lesson 04 Practice Questions.docx - Question 1 Not yet...

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Question 1 Not yet graded / 0 pts According to the cruise ship example, what are the three policy lags and how do they differ with regard to fiscal vs. monetary policy? 1. Recognition Lag- Refers to how long it takes policymakers to recognize where the economy is headed. Same for fiscal policy and Monetary Policy. 2. Implementation Lag- How long does it take for policymakers to implement the policy. Fiscal policy is relatively long. Debates over government spending and tax policies. Monetary policy is very short, 15 seconds. If they want to change the target for a short term interest rate, done just about immediately. 3. Effectiveness Lag- How long does it take for the policy to have the desired effects. Fiscal Policy could be short, e.g. tax cut. The Monetary Policy is long and variable. We don’t know when the boat will turn and it can take a while. Needs to be forward looking. 1. Recognition lag: The recognition lag is the time it takes policy makers to identify the current level of economic activity as well as where the economy is headed. We would think it would be easy to know current economic conditions given the constant stream of economic data available, but this is not necessarily the case since much of this data is reflecting previous economic activity. For a case in point of the recognition lag consider the following: At an FOMC meeting
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