The lag effect in economic refers to the delay that occurs in the implementation of a policy and its impact on the economy. When a policy is implemented as a corrective measure to the economy, the impact of that policy may be seen after a long time this is called as a lag effect. The lag effect may impact a economy negatively as the corrective measures that would be needed may happen at the correct time.

Consider an example, when the government implements fall in the interest rate, the consumers may not be aware of decrease in interest rates. Therefore, the fall in interest rate will lead to increase in investment for some time. Thus there will be a lag in the implementation of this policy.