Principles of Economics, 7th Edition (MindTap Course List)
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
Book Icon
Chapter 36, Problem 1QR
To determine

Lags in the effect of monetary and fiscal policies.

Expert Solution & Answer
Check Mark

Explanation of Solution

Monetary policy affects aggregate demand primarily by changing interest rates. However, mostly households and firms set their spending plans in advance and as a result, there is time lag for changes in interest rate to alter the aggregate demand for goods and services. Also, the fiscal policy works with a lag since they are slowed by long political processes that govern changes in spending and taxes. Due to these long lags, it is more difficult to engage in an active stabilization policy, as the economy will not respond immediately to policy changes. Thus, long lags suggest a policy that is passive rather than active because the economy works with a lag; since the ability to forecast future economic conditions is poor, it may result in the attempts to stabilize the economy in the opposite manner (may result in destabilization).

Economics Concept Introduction

Concept introduction:

Monetary policy: Monetary policy refers to the credit control system adopted by the central bank of a country with an aim to achieve its macroeconomic policy objectives.

Fiscal Policy: Fiscal policy deals with the taxation and expenditure decisions of the government that influence a nation’s economy.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
A stimulative monetary or fiscal action should increase aggregate demand. What factors may limit the actual increase in aggregate demand?
As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard: a. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? c. What specific fiscal policy tools would you use to stimulate aggregate demand and how? d. What specific monetary policy tools would you use to stimulate aggregate demand and how? e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate demand? Explain briefly.
What is the difference between fiscal and monetary policy? What fiscal and monetary steps can the government and the central bank undertake during times of recession to help the economy? What are the pros and cons of fiscal and monetary policy?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics
Economics
ISBN:9781337617390
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning
Text book image
Economics Today and Tomorrow, Student Edition
Economics
ISBN:9780078747663
Author:McGraw-Hill
Publisher:Glencoe/McGraw-Hill School Pub Co