Effects of Monetary Policy

Definitions:

Easy Money Policy - FED lowers interest rates, + prints money (makes it easier to get); expands the economy (gas pedal)

Tight Money Policy - FED raises interest rates, + destroys money or puts it in banks (makes it harder to get); contracts the economy (brake pedal)

Inside Lags - the time it takes to formulate a policy

Recognition Lag (IL) - the time it takes to determine fiscal policy action is needed

Law-making Lag (IL) - the time it takes Congress to pass the laws needed to adjust taxes/spending

Outside Lag (Effect/Operational Lag) - the time it takes to implement a policy and see improvement

Impact Lag (OL) - the time it takes from passing a tax/spending change to seeing its effect