Download Policy Lags

Policy Lags
AP Macroeconomics
Where did we come from?

In the previous unit, we
learned about money,
and the effects of
monetary policy on
output, employment,
interest rates, and the
price level.
Remember this little guy? 
http://www.extirpated.org/3.html
Where are we going?
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In this unit, we are going to
bring together fiscal and
monetary policy and expand
on policy-related issues.
This unit explores the
interactions between
monetary and fiscal policy.
We will also discuss
economic growth, a longrun concept.
http://www.stlouisfed.org/inplainenglish/monetary_policy.htm
Guiding Questions…

What are the sources of economic growth?

How do monetary and fiscal policies
encourage economic growth?
In this lesson…

We will discuss the lags associated with
policy-making.
What is a lag?
Defining the “Inside Lag”

The inside lag consists of the time it take
for the following to occur:

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Data to be collected
Policy makers to recognize that policy
action is necessary
Policy makers to make the decision about
which policy should be taken, and the
implementation of that policy
Defining the “Outside Lag”…

The outside lag is the time it takes the
economy to respond to a new policy.
Quick Review!
Tools of Fiscal Policy:

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Government spending
Taxes
Increase and decreases in
both lead to changes in
output and the price
level.
Tools of Monetary Policy:

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Buying/selling
government securities
on the open market
operations
Discount rate
Reserve requirement
NOTE:
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Lags differ in length for monetary and fiscal
policy.
Inside lag is short for monetary policy (the
Federal Reserve makes changes to the
money supply on a daily basis)
Outside lag is short for fiscal policy (it takes a
long time for Congress to debate on the floor,
but a short time for people to respond to a
policy once it’s implemented)
And now…

Some resources:
Reffonomics:
http://www.reffonomics.com/
Morton workbook: Activity 43
Krugman: Module 31
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.