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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
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.
- The economy is overheating and some government officials ask for tax increase. However, the president does not approve the policy.
- Firms investments decrease, but the government does not know the problem.
- Government gives out free food. Ada gets the free food instead of buying food from a grocery store.
- Real GDP is falling, and inflation is very high. The government does not know what to do.
- The government can understand the economy better if data are collected and reported more frequently.
- The government raised the government spending 2 years ago. Yet no effect has been observed so far.
- The government is running into a huge deficit. Households prepare for it now by saving more.
- Government keeps borrowing and interest rate continues to rise. Firms cut the purchases on machines.
Expert Solution
A. Implementation lag.
There is a delay in policy implementation due to president's non-approval.
B. Recognition lag.
Since we dont know the problem, it means we dont recognize it.
C. Crowding out
Government's free food is resulting in no takers for private sellers- government is crowding out private sellers.
D. Recognition lag
The government doesnt know what the problem is
E. Implementation lag.
If the government knows the data faster, they can implement the policies quicker.
F. Impact lag.
There has been a delay in policy implementation and its impact.
G. Savings shift.
Since households are now saving more.
H. Crowding out.
Government's increased purchases increased the interest rate, making it harder for private players to get credit. Government crowded out the private players.
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