Role of implementation lags and response lags in monetary policy and fiscal policy.

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Chapter 29, Problem 2.3P

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Role of implementation lags and response lags in monetary policy and fiscal policy.

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The Federal Reserve System's Board of Governors and the Federal Government both maintained expansionary (loose) monetary and fiscal policies during the last economic recession. For the purposes of this essay, assume that recent economic data shows unemployment is increasing significantly again and that the economy is still slowing. We are in a recession. Identify and explain in detail the three monetary policy tools that the Board of Governors could use to fix this recession and the two fiscal policy tools that the Federal Government could adopt to address the problem. Be specific in explaining what the tools are, how they work, what they are fixing, and how the actions of the Fed and Government will affect people's spending and saving habits, aggregate demand in the economy, and the amount of money in circulation.

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