MONICA NAIDU 

ROLL NO –6
M.A BUSINESS ECONOMICS 
PART-1
SEMESTER-2
SUBJECT:MACRO ECONOMICS
PROJECT TOPIC:LAGS IN THE EFFECYS OF POLICY.
 • Describe and differentiate between types of
 Learning policy lags
• Explain how policy lags, policy imprecision,
Objectives time, and politics can complicate or
  compromise the effectiveness of fiscal and
monetary policy.
 • ‘In Economics, A policy lag is the lag between
the time an economic problem arises, such
as recession or inflation, and the effect of a
IN SIMPLE policy intended to counteract it.
• Notice I just used the word 'counteract.'
WORDS... Economists sometimes use the word
'countercyclical policy,' which simply means
stabilizing a recessionary or overheating
economy using monetary or fiscal policy.’
  The inside lag consists of the time it takes for
the data to be collected, policy makers to
Lags recognize that policy action is necessary, the
associated decision about which policy should be taken
and the implementation of the policy.
with policy  The outside lag refers to the time it takes for
making the economy to respond to the new policy.
These lags differ in length for monetary
policy and fiscal policy.
 • Policy lags arise because government actions are
not instantaneous. The use of any stabilization
policy encounters time lags between the onset of an
economic problem, such as a business- cycle
contraction or the onset of inflation and the full
impact of the policy designed to correct the
Reasons problem. 

for policy • Policy lags can make attempts to fine-tune the

economy and reduce the impact of business cycles
lags counterproductive. As policy operates with a lag, it
will start having effects on an economy subject to
temporary shocks. Policy lags can reduce the
effectiveness of business cycle stabilization policies
and can even destabilize the economy. Policy lags,
especially inside lags, are often different for
monetary policy than for fiscal policy.
 • In the past few years several economists have
raised the possibility that monetary policy may
affect the economy only after a long- and
variable-time lag. The purpose of monetary
Recent policy is to help stabilize the economy.
• The traditional interpretation of this statement
issues in is that monetary policy should stimulate the
policy lags economy when business is slack and tranquilize
it when business is brisk. A lengthy lag in the
effect of monetary policy could mean that it
does just the opposite: stimulates the economy
during inflation and further depresses it during
a recession.
 • As the economic situation changes, policy
makers must decide when to take action and
what policy action to take. Then they must
implement the policy.
Lags in •  The economy then responds to the policy.
policy The amount of time it takes policy makers to
recognize and take action is called inside-
making lags.
• The amount of time it takes the economy to
respond to the policy changes is called
outside or impact lags.
• The inside lag is long for fiscal policy because
the legislative branch must come to
agreement about the appropriate action.
• The outside lag, however, is long and
variable for monetary policy but very short
for the fiscal policy.
The inside lag is estimated to be short for monetary policy
but long for fiscal policy.
The inside lag is long for fiscal policy because the
legislative branch must come to agreement about the
appropriate action.

The outside lag, however, is long and variable for

monetary policy but very short for the fiscal policy.
 • The Federal Reserve can change the money
supply on a daily basis through open market
Explanatio operations. Thus, once the Open Market
n for Committee decides on a particular policy,
the policy can be implemented immediately.
shorter • However, monetary policy works through
and longer changes in interest rates and the response of
interest-sensitive components of AD to the
lags interest rate changes. The response of
investment and consumption takes time.
Explanation for shorter outside lag
in fiscal policy

FISCAL POLICY HAS BEEN DEBATED IN CONGRESS IF THE FISCAL POLICY IS A TAX CHANGE, THE IF THE FISCAL POLICY IS AN EXPENDITURE
AND DISCUSSED EXTENSIVELY IN THE MEDIA. EFFECTS WILL BE WITHIN A YEAR’S TIME. CHANGE, THE EFFECT WILL BE FELT ALMOST
THUS, AS SOON AS IT IS ENACTED, PEOPLE CAN IMMEDIATELY AS THE AFFECTED AGENCY
RESPOND. CHANGES ITS SPENDING PATTERN.
 • The existence of policy lags implies that policy
actions could be out of sequence with the economy.
Why lags For example, expansionary policy might have its
impact after the economy has started to recover
are from a recession. As a result, the expansionary
important policy may create inflation because it over
stimulates the economy.
in • This problem has led some economies to
discussion recommend policy rules. Examples of policy rules
are that money supply should grow at 5% a year and
of nominal GDP should grow at 6% a year. There’s a
second reason why understanding lags is important
stabilizing for stabilization policy. Policy makers should not
policy think that policy can fine-tune the economy at any
point in time.
              
 Thankyou