The lag before the full effects of monetary policy on inflation are felt is longer than the lag before its effects on real output and unemployment are felt.

Question

Quizplus · Accepted Answer

This is because changes in interest rates take time to be transmitted through the economy and affect consumer and business behavior, leading to changes in inflation over a longer period of time. On the other hand, changes in interest rates generally have more immediate effects on spending and investment decisions, which impact real output and employment more quickly.

The Lag Before the Full Effects of Monetary Policy on Inflation