Question

1. Describe the lags in the policymaking process and how they might lead to instability?,Why is there an effectiveness lag for monetary policy?

Answer 1

1. Data lag
2. Recognition lag
3. Legislative lag
4. Transmission lag
5. Effectiveness lag.
Data lag is the lag that we face while availing data.

Recognition lag is the lag while recognizing the collected data.

Legislative lag- debates and discussions leads to this kind of of lag.

Transmission lag- lag of policy implementation .

There is an effectiveness lag in economy because economy consists of vast population, involved in various works and everyone impacts the rest others. There is effective lag because it takes a lot of time for the policy to hit the economy at its peak due to vast population and Interdependence of actions.

For example higher interest rates will slow down borrowing, this will affect production slowly and then prices will hike and inflation will arise. This take around 1 or 1 and a half year