Which of the following is a type of lag problem faced by the government when implementing fiscal policy?

• A. Interest rate lag
• B. Inflation lag
• C. Exchange rate lag
• D. Recognition lag

Answer: (D)

Verified step by step guidance

1. Step 1: Understand what a 'lag' in fiscal policy means. A lag refers to the delay between when an economic problem arises and when the government’s fiscal policy can effectively address it.
2. Step 2: Identify the types of lags commonly discussed in fiscal policy: Recognition lag, Decision lag, Implementation lag, and Impact lag. These describe different stages where delays can occur.
3. Step 3: Recognize that 'Recognition lag' is the time it takes for the government to realize there is an economic problem that requires fiscal intervention. This is different from lags related to interest rates, inflation, or exchange rates, which are more associated with monetary policy or economic outcomes.
4. Step 4: Note that 'Interest rate lag', 'Inflation lag', and 'Exchange rate lag' are not standard terms used to describe fiscal policy lags. They are more related to monetary policy effects or economic variables rather than the timing of fiscal policy actions.
5. Step 5: Conclude that the correct type of lag problem faced by the government in fiscal policy implementation is the 'Recognition lag', as it captures the delay in identifying the need for fiscal action.