Question

Question 1

A.) What are the inside lag and outside lag?

B.) Which has the longest inside lag--monetary or fiscal policy? Why?

C.) Which has the longest outside lag--monetary or fiscal policy? Why?

Answer 1

A)

Inside lag: it is a period that is taken between the recognition of the problem and the time taken to make the decision.

Outside lag: it is a period between the decision taken or implemented and actual effects of actions.

B)

Under the fiscal policy inside lag is larger than the monetary policy. Monetary policy is managed by the experts, thus its inside lag is small, on another hand, fiscal actions are taken by the political leaders who are not experts. Hence, inside lag is larger.

c)

outside lag is larger in the monetary policy. fiscal policy produces the impacts immediately. Outside lag is smaller in the fiscal policy.