Discretionary fiscal policy A) may not have desired effects on ...

[torybrooks]

Discretionary fiscal policy
 
  A) may not have desired effects on real GDP because it leads to decreases in aggregate demand.
  B) may not have desired effects on real GDP because of the time lags.
  C) would have a larger effect on real GDP if the multiplier was smaller.
  D) may not have desired effects on real GDP because it leads to increases in aggregate demand.

Question 2

How should the central bank design its monetary policy during a recession if the nominal interest rate has already hit the zero lower bound?
 
  What will be an ideal response?

[momtoalll]

Answer to Question 1

B

Answer to Question 2

The central bank usually lowers the real interest rate to stimulate economic growth when the economy is in recession or growing only slowly. However, if the nominal interest rate is already at the zero lower bound, it cannot be lowered further. In this case, the central bank tries to influence expectations of future nominal interest rates and future inflation.