Question

Agree or disagree

The monetary and the fiscal policies work hand and hand to run the economy in the right direction. Lags in these policies can be caused by people setting their goals in advance which creates changes in the interest rates and the aggregate demand. It could also be used to predict the fluctuations in the economy. The policy makers have the authority to clear out any lope holes if needed. The implications of these lags is that when the policy is put into effect, it takes a bit of time to get through the governments system and stabilize the economy. These time lags slow the process of bettering the economy. The new policies carried out may have unseen results and possibly go in the wrong direction and will eventually take it to a new equilibrium.

Answer 1

Agree.

Both the monetary and fiscal policy have to work in tandem to move the economy to the desired equilibrium level. Fiscal policies through changes in government expenditure and tax revenue and monetary policy through changes in the level of money supply will lead to changes in the equilibrium level in the economy. The time lag in the implementation occurs when the policy is put into effect. This has leads to slowing down of the bettering process in the economy. If the expectation of people differ with the government and according to New Keynesian Economics if the people do not believe in credibility of the government , then the policy will not work in the desired direction and thus the impact on real variables in the economy will not be as expected by the government.