Question

7. Fiscal policy - Criticisms and complications Complete the following table by indicating whether each scenario is an example of a recognition lag, implementation lag, or impact lag. Recognition Lag Implementation Lag Scenario Impact Lag The economy enters a deep recession, and Parliament passes spending bills for public works projects that will take years to plan and build. The economy enters a deep recession during a period in which quarterly data are showing positive economic growth. The economy enters a deep recession, and Parliament takes two months to approve an extensive tax-cut bill.

Answer 1

The first case belongs to the impact lag. This is because the proposal of building public work projects will take a lot of time which means there will be delay in healing the economy.

The second case belongs to the recognition lag because the data are showing economic growth which means it will be difficult to recognise a recession

The third case belongs to implementation lag because parliament will take a lot of time in developing the required policy.