Question

7. TRUE or FALSE: Because of the lags inherent to discretionary fiscal policy, such policy is as likely to be pro-cyclical as it is to be counter-cyclical.

Answer 1

TRUE

Explanation: Procyclical means something with a positive effect, while countercyclical means a negative effect. The terms can be used to refer to a government's approach to spending and taxes.

The “case against discretionary fiscal policy” rests on two arguments: first, the possibility of interest rate “crowding-out” that keeps fiscal multipliers close to zero, and second the possibility that expenditure timing lags would cause any discretionary fiscal impulse to come too late and actually make policy pro-cyclical. The mistiming case against discretionary fiscal policy stabilizations holds that fiscal policy support is often associated with lags both in deliberation (the inside lag) as well as implementation (the outside lag). These lags imply that that fiscal policy support may be injected into the economy after an economic recovery has already (spontaneously) begun.