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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

Consider the diagram below, in which the current short-run equilibrium is at point A, and answer the questions that follow.

a. What type of gap exists at point A?

b. If the marginal propensity to save equals 0.02, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)? Explain.

A government is currently operating with an annual budget deficit of \(40 billion. The government has determined that every \)10 billion reduction in the amount it borrows each year would reduce the market interest rate by 0.1 percentage point. Furthermore, it has determined that every 0.1-percentage-point change in the market interest rate generates a change in planned investment expenditures in the opposite direction equal to \(5 billion. The marginal propensity to consume is 0.75. Finally, the government knows that to eliminate an inflationary gap and take into account the resulting change in the price level, it must generate a net leftward shift in the aggregate demand curve equal to \)40 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? (Hint: How much new private investment spending is induced by each $10 billion decrease in government spending? )

2. Why do you suppose that some economists have argued that a key determinant of a nation's stabilization coefficient value is whether its government relies to a greater extent on automatic fiscal stabilizers instead of discretionary policy actions?

Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

b. The government increases its expenditures without raising taxes. 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. The government finances the construction of a classical music museum that otherwise would never have received private funding.

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?
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