The economy is in a recession and the recessionary gap is large. Explain the risks of...
The economy is in a recession and the recessionary gap is large. Explain the risks of discretionary fiscal policy in this situation Discretionary fiscal policy is risky because it is hampered by all of the following lags except ______.
A. recognition lag B. impact lag C. law-making lag D. business cycle lag
Homework Answers
Option D
- When the Economy is facing a period of Recession and if the Recessionary gap is long then using discretionary policy in this situation is risky because it is hampered by all of the following lags except business cycle lag.
- Discretionary fiscal policy is used by the government to expand or shrink the Economy whenever required by changing the government spending or taxes.
- Discretionary fiscal policy is hampered by three time lags.:-
1. Recognition lag:-. As it imperfectly forecasts recession or a boom.
2. Impact lag:-. The impact of fiscal policy takes approximately 6 to 12 months to create an impact in an Economy..
3. Law making lag:- The time required to make or change laws is quite lengthy.
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The economy is in a recession and the recessionary gap is large.
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Figure:
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Figure:
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