Which of the following is an example of inside lag in monetary policy?

Question

The U.S. government debates a public works program and chooses not to spend money on new highways and railroads.

Corporations respond slowly to increases in interest rates by reducing their planned investment for future years.

Individual banks ignore a reduction in the required reserve ratio and hold excess reserves.

Members of the Board of Governors refuse to lower the discount rate until several months after a recession has begun.

Answer 1

The example of inside lag in monetary policy from the options provided is:

Members of the Board of Governors refuse to lower the discount rate until several months after a recession has begun.

Inside lag refers to the delay between the recognition of an economic issue (such as a recession) and the implementation of policy measures to address it. In this case, the delay in lowering the discount rate indicates an inside lag, as the decision-makers (the Board of Governors) are not acting promptly in response to the economic conditions.