Question

The existence of lags in designing and implementing fiscal policy helps illustrate some of the limitations of fiscal policy aimed at easing the burdens of a recession. Which of the following statements best describes a situation when fiscal policy is more appropriate?
a. The economy is quick to self-correct but the recession is very severe.
b. The economy is slow to self-correct or the recession is very severe.
c. The implementation lag is shorter than the recognition and legislative lags.
d. Fiscal policy favors tax cuts instead of increased government purchases since this removes the legislative lag.

Answer 1

Answer:

The correct answer is B

Explanation:

Due to the implementation lag, recognition lag and legislative lag linked with the enacting fiscal policy, the policies focus on the smoothing the business cycle, which sometimes have the opposite effect.

The risk of the policies being the pro- cyclical instead of being advantageous in a time of recession diminishes or decline when the recessions are severe and long.

It is more likely the fiscal policies which could de implemented or executed and developed in time if it will take a long time for the economy to self- correct.