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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Explain why monetary and fiscal policies work with a lag. Why do these lags matter in the choice between active and passive policy?

To determine

Lags in the effect of monetary and fiscal policies.

Explanation

Monetary policy affects aggregate demand primarily by changing interest rates. However, mostly households and firms set their spending plans in advance and as a result, there is time lag for changes in interest rate to alter the aggregate demand for goods and services. Also, the fiscal policy works with a lag since they are slowed by long political processes that govern changes in spending and taxes...

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