Which of the following is one reason for the existence of policy lags?
A)Government experts are slow in figuring out what is going on.
B)Households and firms plan their spending in advance and therefore are slow in responding to changes in interest rates.
C)It is impossible to build an accurate model of the economy.
D)It is difficult for the Bank of Canada to change the bank rate.

Question

Quizplus · Accepted Answer

Policy lags exist because households and firms plan their spending in advance and are slow in responding to changes in interest rates. When the central bank changes interest rates, it takes time for the effects of the changes to be felt by households and firms. This lag is known as the "impact lag." Similarly, when the government implements policies such as tax cuts or increased spending, it takes time for these policies to be fully implemented and for their effects to be felt. This lag is known as the "implementation lag." Hence, one reason for the existence of policy lags is the slow response of households and firms to changes in policy.

Which of the Following Is One Reason for the Existence