Time Lags: Its Impact on the Effectiveness of Discretionary Fiscal Policy

Examine why time lags in discretionary fiscal policy can adversely affect the efforts of the Congress and the President in attempting to maintain a healthy economy. Could it happen that these time lags could actually work to destabilize the economy?

In 2003, the Internal Revenue Service began to mail out refund checks because of a change in the tax law. Economic forecasters predicted that consumption and GDP would increase because of higher refunds on income taxes.

Pretend as if you are an economist and describe your thoughts on whether the tax cuts from the past few years have been successful in promoting economic growth or in preventing a deeper decline? Are there other changes to fiscal policy that you feel would have been more successful?

1.Describe three ways in which the Federal Reserve can change the money supply.
2.If the Federal Reserve is going to adjust all of these tools during an economy that is growing too quickly, what changes would they make?
3.If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make?
4.What changes, if any, to the current condition of these tools would you make at the next meeting of the Federal Reserve? describe why and the benefits/drawbacks of this strategy.