The principal reason that monetary policy has lags is that it takes a long time for
A)changes in the interest rate to change aggregate demand.
B)changes in the money supply to change interest rates.
C)the Fed to make changes in policy.
D)Congress and the President to approve Fed policy.

Question

Quizplus · Accepted Answer

It takes time for changes in interest rates to affect spending decisions by households and firms, and for those spending decisions to then ultimately impact aggregate demand. This lag is often called the "impact lag." Additionally, there can be other lags in the transmission of monetary policy, including a "recognition lag" (time it takes for policymakers to recognize that a change in policy is needed) and an "implementation lag" (time it takes for the policy change to be put into effect).

The Principal Reason That Monetary Policy Has Lags Is That