Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, or operational lag.
a. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.
b. Distracted by a war that is going badly, inflation reaches 8 percent before politicians take notice.
c. A sudden recession is recognized by politicians, but it takes many months of political deal making before a stimulus bill is finally approved.
d. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.
6. In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?
a. There is no crowding-out effect because the government’s increase in borrowing exceeds firm’s decrease in borrowing.
b. There is a crowding-out effect of $20 billion.
c. There is no crowding-out effect because both the government and firms are still borrowing a lot.
d. There is a crowding-out effect of $25 billion.
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