Principles of Macroeconomics / Unit 14 MAC 1326 worked example, 60 to 90 seconds
Name the Lag, Fiscal Version
The idea
Given a delay, name which lag it is and say what could shorten it. The test is what is being waited on, exactly as at unit ten. What differs here is the weighting: agreeing a measure takes far longer than agreeing a rate change, so the middle lag dominates.
In practice
A recession is later dated as having begun ten months before anyone announced it: recognition, shortened only by better and faster data. A tax cut is proposed as a remedy for a recession, recommended two years later, and enacted three years after that recession had already ended: implementation, and it is the one fiscal policy does worst. Money is appropriated but the agency approving the projects takes two more years to approve any: still implementation, because nothing has reached the economy. Spending finally begins and firms take a further year to hire and build: impact.
Where people slip
Automatic stabilisers escape the first two lags entirely, which is their real advantage: they need no recognition because they respond to the economy itself, and no implementation because the law already exists. That is the strongest argument in this unit for relying on them and reserving discretionary measures for downturns deep enough to outlast the delay.
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