If an economic disturbance is known to be transitory,
A)discretionary monetary policy should be undertaken because of its short outside lag
B)discretionary fiscal policy should be undertaken because of its short inside lag
C)consumption is likely to be significantly affected
D)policy makers should proceed cautiously, since there is always the possibility that any policy action may itself be destabilizing
E)none of the above

Question

Quizplus · Accepted Answer

Since the disturbance is known to be transitory, policy makers should proceed cautiously as any policy action may have unintended consequences and may end up being destabilizing. This is because the economy will likely self-correct without the need for any policy intervention. Therefore, discretionary policy should only be used if absolutely necessary and with caution.

If an Economic Disturbance Is Known to Be Transitory