Assume that the Bank of Canada knows a demand shock has occurred in the economy.It takes the Bank of Canada two months to adjust policy to the shock,and it takes the economy 14 months for the policy change to affect the economy.The two-month time period refers to the ________,and the following 14-month time period refers to the ________.
A) policy lag; implementation lag
B) recognition lag; implementation lag
C) implementation lag; impact lag
D) policy lag; recognition lag

Question

Quizplus · Accepted Answer

The two-month time period refers to the policy lag, which is the time it takes for authorities to change monetary policy in response to a shock. The following 14-month time period refers to the implementation lag, which is the time it takes for the policy change to affect the economy. Hence, option C, which matches these definitions, is the correct answer. Option A incorrectly uses "implementation lag" for the initial two-month period, while option B uses "recognition lag" instead of "policy lag." Option D mistakenly reverses the order of the lags.

Assume That the Bank of Canada Knows a Demand Shock