2.5.3
Fiscal Policy Lags
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Fiscal Policy Lags
The government can change monetary policy several times each year, but it takes much longer to enact fiscal policy. Imagine that the economy starts to slow down.
The issue of policy lags
- The ability of the government to recognize a situation of too little or too much AD, and to adjust accordingly with the right level of changes in taxes or spending is a key assumption behind the operation of fiscal policy.
Recognition lag
- It often takes some months before the economic statistics signal clearly that a downturn has started, and a few months more to confirm that it is truly a recession and not just a one- or two-month blip.
- Economists often call the time it takes to determine that a recession has occurred the recognition lag.
Legislative lag
- Economists often refer to the time it takes to pass a bill as the legislative lag.
- When policymakers propose a bill, it must go into various congressional committees for hearings, negotiations, votes, and then, if passed, eventually for the president’s signature.
- Many fiscal policy bills about spending or taxes propose changes that would start in the next budget year or would be phased in gradually over time.
Implementation lag
- Finally, once the government passes the bill it takes some time to disperse the funds to the appropriate agencies to implement the programs.
- Economists call the time it takes to start the projects the implementation lag.
How much fiscal policy should be implemented?
- The exact level of fiscal policy that the government should implement is never completely clear.
- Should it increase the budget deficit by 0.5% of GDP? By 1% of GDP? By 2% of GDP? In an AD/AS diagram, it is straightforward to sketch an aggregate demand curve shifting to the potential GDP level of output.
- In the real world, we only know roughly, not precisely, the actual level of potential output, and exactly how a spending cut or tax increase will affect aggregate demand is always somewhat controversial.
1Microeconomics
1.1Competitive Markets: Demand & Suply
1.2Elasticity
1.3Government Intervention
1.4Market Failure
1.4.1Types of Market Failure1.4.2Introduction to Externalities1.4.3Negative Externalities1.4.4Policy for Negative Externalities1.4.5Positive Externalities1.4.6The Deadweight Welfare Loss of Externalities1.4.7Case Study - The Externalities of Education1.4.8Public Goods & the Free-Rider Problem1.4.9Asymmetric Information1.4.10End of Topic Test - Market Failure1.4.11Application Questions - Market Failure
1.5HL: Theory of the Firm & Market Structures
2Macroeconomics
2.1The Level of Overall Economic Activity
2.2Aggregate Demand & Aggregate Supply
2.2.1The Aggregate Demand Curve2.2.2Components of Aggregate Demand2.2.3Shape of the Aggregate Demand Curve2.2.4Shifts in Aggregate Demand2.2.5IB Multiple Choice - Aggregate Demand2.2.6Short & Long-Run Aggregate Supply2.2.7Alternative Models of LRAS2.2.8Equilibrium in the AD-AS Model2.2.9Output Gaps & the AD-AS Model
2.3Macroeconomic Objectives
2.3.1Introduction to Unemployment2.3.2Limitations of Unemployment2.3.3Types of Unemployment2.3.4Causes & Impact of Unemployment2.3.5Defining Inflation2.3.6Measuring Inflation2.3.7Use of Index Numbers2.3.8The Consumer Price Index2.3.9Consequences of Inflation2.3.10Causes of Inflation2.3.11Inflation & Unemployment Tradeoff2.3.12The Short-Run Phillips Curve2.3.13The Long-Run Phillips Curve
2.4Economic Growth, Poverty & Inequality
2.5Fiscal Policy
2.6Monetary Policy
2.7Supply-Side Policies
3The Global Economy
3.1International Trade
3.2Exchange Rates
3.3The Balance of Payments
3.4Economic Integration
3.5Terms of Trade
3.6Economic Development
3.7The Role of Domestic & International Factors
3.8The Role of International Trade
3.9The Role of Foreign Aid
Jump to other topics
1Microeconomics
1.1Competitive Markets: Demand & Suply
1.2Elasticity
1.3Government Intervention
1.4Market Failure
1.4.1Types of Market Failure1.4.2Introduction to Externalities1.4.3Negative Externalities1.4.4Policy for Negative Externalities1.4.5Positive Externalities1.4.6The Deadweight Welfare Loss of Externalities1.4.7Case Study - The Externalities of Education1.4.8Public Goods & the Free-Rider Problem1.4.9Asymmetric Information1.4.10End of Topic Test - Market Failure1.4.11Application Questions - Market Failure
1.5HL: Theory of the Firm & Market Structures
2Macroeconomics
2.1The Level of Overall Economic Activity
2.2Aggregate Demand & Aggregate Supply
2.2.1The Aggregate Demand Curve2.2.2Components of Aggregate Demand2.2.3Shape of the Aggregate Demand Curve2.2.4Shifts in Aggregate Demand2.2.5IB Multiple Choice - Aggregate Demand2.2.6Short & Long-Run Aggregate Supply2.2.7Alternative Models of LRAS2.2.8Equilibrium in the AD-AS Model2.2.9Output Gaps & the AD-AS Model
2.3Macroeconomic Objectives
2.3.1Introduction to Unemployment2.3.2Limitations of Unemployment2.3.3Types of Unemployment2.3.4Causes & Impact of Unemployment2.3.5Defining Inflation2.3.6Measuring Inflation2.3.7Use of Index Numbers2.3.8The Consumer Price Index2.3.9Consequences of Inflation2.3.10Causes of Inflation2.3.11Inflation & Unemployment Tradeoff2.3.12The Short-Run Phillips Curve2.3.13The Long-Run Phillips Curve
2.4Economic Growth, Poverty & Inequality
2.5Fiscal Policy
2.6Monetary Policy
2.7Supply-Side Policies
3The Global Economy
3.1International Trade
3.2Exchange Rates
3.3The Balance of Payments
3.4Economic Integration
3.5Terms of Trade
3.6Economic Development
3.7The Role of Domestic & International Factors
3.8The Role of International Trade
3.9The Role of Foreign Aid
Practice questions on Fiscal Policy Lags
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- 1Why might there be lags to fiscal policy? Multiple choice
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