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Chapter 13: Q. 13.3 (page 281)

List and define fiscal policy time lags and explain why they complicate efforts to engage in fiscal "fine tuning".

Short Answer

Expert verified

After the variability is identified, Congress needs to discuss, discuss, pass the bill, and sign it. This delays the operational impact of the policy. Therefore, delays affect the implementation of fiscal policy.

Step by step solution

01

Step 1- Introduction

There is a time lag between a given measure and its effect, and the length of this time determines how effective fiscal policy is.

02

Step 2- Explanation

The maximum delay is

  1. Detection Delay This is the interval between when an action is needed and when it is detected. If you have enough predictive tools and techniques, you can reduce this.
  2. Management delay interval between the need for an action and the execution of the actual action. It is the most difficult delay to manage and can last from 1 to 15 months. To reduce this delay, we need to prepare public works and significantly reduce bureaucracy.
  3. Operational lag Interval between when action is taken and when it has an impact on the economy, income and employment.
03

Step 3- Conclusion

Due to the short inside lag in monetary policy but the short outside lag in fiscal policy, delays make implementation and policy making very difficult. This means that parliament and government agencies take a long time to formulate appropriate policies, but once implemented, people take a short time to respond. The detection lag reviews historical data that primarily describes past events, so in retrospect, analysis and review of this data can take weeks to detect business cycle fluctuations.

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Most popular questions from this chapter

1. How does unemployment compensation function as an automatic stabilizer?

Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.

a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.

b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?

A government has found that 2 months elapse before it can identify a problem to address with policy action. It has been found that 1 month is required to determine the appropriate policy action. Finally, it has been concluded that the total time required between the initial presence of the problem and the effects of a policy action to be realized is 12 months. What are the remaining policy time lag and its duration?

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?
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