Posted: August 2nd, 2015

Monetary and fiscal policies are said to have lags. What are lags and why do they exist?

Monetary and fiscal policies are said to have lags. What are lags and why do they exist? How are the arguments for and against active policy decisions affected by these lags?

The government often wants to stabilize or stimulate the economy. In order to do so, they must decide on the relative size of the money supply, taxes, government spending, or some combination of these alternatives. What are the difficulties encountered in deciding which policy to enact and the size or magnitude of these actions? Use examples when answering these questions.