Which of the following best describes a critical dilemma associated with timing lags when implementing fiscal policy?

• A. Fiscal policy actions may take effect after the economy has already changed direction, potentially destabilizing output.
• B. Fiscal policy timing lags are irrelevant because government spending can be adjusted instantly.
• C. Timing lags only affect monetary policy, not fiscal policy.
• D. Timing lags ensure that fiscal policy always stabilizes the economy immediately.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what timing lags in fiscal policy mean. Timing lags refer to the delays between recognizing an economic problem, implementing a fiscal policy response, and the policy actually affecting the economy.
2. Step 2: Identify the types of timing lags involved: recognition lag (time to identify the economic issue), decision lag (time to decide on the policy), and implementation lag (time for the policy to take effect).
3. Step 3: Analyze how these lags can cause fiscal policy to be mistimed. Because of delays, by the time the policy impacts the economy, the economic conditions may have already changed.
4. Step 4: Recognize the critical dilemma: if fiscal policy takes effect after the economy has shifted direction, it can amplify fluctuations instead of stabilizing output, potentially destabilizing the economy.
5. Step 5: Compare this understanding with the given options to identify the statement that best captures this dilemma, which is that fiscal policy actions may take effect after the economy has already changed direction, potentially destabilizing output.