Question

Inside and outside lags:

A) What are the inside lag and the outside lag? Explain using an example for each one.

B) Which one has longer inside lag: Monetary or fiscal policy? Explain.

C) Which one hs longer outside lag: Monetary or fiscal policy? Explain.

Answer 1

(A) Inside lag is are delay in implementing policy. it can take additional time to enact policies, which is more monetary policy. outside lag is the time it takes for monetary policy to have an effect.

(B) Fiscal policy has a long inside lag—for example, it can take years from the time a tax change is proposed until it becomes law. Monetary policy has a relatively short inside lag. Once the Fed decides a policy change is needed, it can make the change in days or weeks.

(C) Monetary policy has a longer outside lag. Fiscal policy, despite having a larger inside lag than monetary policy, has a shorter outside lag. The long inside lag makes fiscal policy less useful for stabilization and means that fiscal policy tends to be used relatively infrequently to try to stabilize the economy.