For each of the separate scenarios, discuss the associated shortcoming of fiscal policy: (1) recognition lag; (2) implementation lag; (3) impact lag; (4) crowding out; or (5) savings shift

a.)

The first one is a basic example of recognition lag in fiscal policy. It is because there is a lag in the monetary and fiscal authorities to recognise the problem in the economy. This lag arises because of the infrequent collection of data in the economy. When economic data is collected and published, it is already months old, and the porblem is hence reported and recognised late.

b.)

This is an example of impact lag. This refers to the time that elapses between the point when the policy is implemented and the time when its impact is first seen on the economy. This can happen due to a multitude of reasons, the most prominent being the fact that in huge economies, it often takes time for the population to realise the policy change and to act accordingly.

c.)

This is savings shift. Here, the savings increases due to the expected future course of the economy by the people in the economy. Here, since the government has a deficit budget, it is seen that the future may come with higher taxes and hence the people are saving up more in the present period.

d.)

This is crowding out. It is defined as the situation when there is excessive government spending funded through borrowing which increases the interest rates and disincentivises private investment in the economy. As a result of this, the impact of the increase in government spending in the economy reduces as private investment backing is not received