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.

http://www.extirpated.org/3.html

Remember this little guy?

Where are we going?

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 long-run 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: 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:

Government spending Taxes

Increase and decreases in both lead to changes in output and the price level.

Tools of Monetary Policy:

Buying/selling government securities on the open market operations

Discount rate Reserve requirement

NOTE:

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

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.