ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The effect lag is the amount of time between the time action is taken and an effect is realized. Monetary policy involves longer delays than fiscal policy; the time between a change in monetary policy and its ultimate effect on private investment may be between one and two years.

Detailed explanation-2: -Monetary policies have shorter time lags than fiscal policies. This is because the agency that implements monetary policies, the central bank, is not a government bureaucracy, which means that its tools are more effective than fiscal tools, hence lessening its policy lag time.

Detailed explanation-3: -Fiscal policy time lags are typically longer than monetary policy time lags. It’s because the above-mentioned temporal lags are more common in fiscal policy. In the event that the economy enters a recession, for example, there would be a lag in recognising the commencement of the recession (recognition lag).

Detailed explanation-4: -It’s worth pointing out that monetary policy is generally a lot faster to act, as it requires less discussion and can deliver an impact almost immediately. In contrast, fiscal policy can take time to agree on and for the effects to be felt within the economy.

Detailed explanation-5: -Key Takeaways. The response lag is the period between the time a monetary or fiscal policy change is implemented and the time an economic impact is felt. Such policies are often instituted in response to a devastating economic effect, or to help support the economy at a certain point in the economic cycle.