Question

Which of the following statements is/are true?

A. None of the statements are true.

B. Outside Lag for Fiscal Policy is much shorter than Monetary Policy

C. Inside Lag for Fiscal Policy is much longer than Monetary Policy.

D. Inside Lag for Fiscal Policy is much shorter than Monetary Policy.

Answer 1

Statement - Which of the following statements is/are true?

Answer - Both options B and C are correct

Explanation -

What is outside lag? -- it is the time required for policy change to affect the economy. It includes variables like the impact lag and the response lag/

What is inside lag? -- Inside lags refer to the delay between the time a policy change is needed and the time the policy change is implemented. It includes variables like recognition lag, decision lag, and action lag.

Fiscal policy represents changes in government spending which acts directly on aggregate demand leading to a shorter outside lag. Monetary policy on the other hand, affects money supply and interest rates, hence affecting the investment which responds slowly to the changes.

In the case of inside lag, monetary policies are used more frequently (quarterly) while fiscal policies are used over a longer duration of time.