CFA Level I · CFA Level I Exam · Fiscal Policy
A government approves a large infrastructure program to counter a recession, but the projects take two years to plan and start. The recession ends before spending begins. This situation is best described as a problem arising from:
This is an implementation (action) lag. The government decided on the stimulus, but the time needed to plan and start the projects delayed its effect until after the recession ended, so the policy may arrive too late or even be pro-cyclical.
- Acrowding out
- Ba recognition lag
- Can implementation lagCorrect
Explanation
The delay between deciding on a fiscal action and its actual effect on the economy, caused here by planning and start-up of projects, is the action or implementation lag. A recognition lag concerns the time taken to see that a problem exists, and crowding out concerns private investment displaced by borrowing.
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