Principles of Macroeconomics / Unit 10 MAC 0917 worked example, 60 to 90 seconds
Name the Lag
The idea
Given a description of a delay, name which of the three lags it is. The test is what is being waited on. Recognition waits on information about where the economy is. Implementation waits on the decision and the machinery that carries it out. Impact waits on the economy itself to respond to a change already made.
In practice
Output figures for a quarter arrive months later and are then revised, so nobody knew at the time that a downturn had begun: that is recognition. A tax change is proposed, debated for a year and takes effect the following year: that is implementation, and it is the stage the anchor calls the legislative lag. A rate cut takes effect immediately but borrowing, hiring and building respond over the following year or more: that is impact. Add the three and a response to a one-year recession can land after it has ended.
Where people slip
The three are cumulative, so naming one correctly matters less than adding all three. An argument that any single lag is short does not show the total is short, and the total is what decides whether policy damps a cycle or amplifies it.
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