Question

What can we say about which type of policy, fiscal or monetary, once enacted affects the economy more quickly?

Select one:

A. The lag between a change in fiscal policy and its effect on output tends to be shorter.

B. Changes in monetary policy normally take effect on the economy with little or no lag.

C. They both take the same amount of time to take effect.

D. It is impossible to tell how long either policy will take to affect the economy.

In order to fix a recession, an action the Federal Reserve might take (such as it did in 1991) is to

Select one:

A. raise the Discount Rate.

B. reduce the tax rate.

C. increase government spending.

D. lower the Federal Funds rate.

Answer 1

Ans 1: A. The lag between a change in fiscal policy and its effect on output tends to be shorter.

As compared to monetary policy, the lags for fiscal policy is shorter. The lags for the monetary policy is longer.

Ans 2: (D) lower the Federal Funds rate. (This would cause the increase in monetary policy which would increase aggregate demand in the economy which causes increase in output.

However. option B and C are the examples of fiscal policy and option A would cause a decrease in aggregate demand and is not suitable option in recession.