Policymakers are always confronted with the difficulty of responding to disruptions in the economy's aggregate demand. They have a number of challenges in attempting to stabilize the applicable policies in the event of a disruption. One of these issues is the issue of delays or lags. Lags caused by monetary and fiscal policy on aggregate demand are classified into two types: inside lags and outer lags. The inside lags refer to the time it takes to implement the policies after the occurrence of a disturbance in the economy. The inside lag may be caused by several factors including the time it takes the policy makers to realize a disturbance and the time that the policy response is warranted, the period taken to decide on the policy whether monetary or fiscal desirable to the disturbance. Finally, the period it takes to implement the policy measure may also cause the lag. The outside lag, on the other hand, is caused by the time taken for an already implemented policy to have an effect on the aggregate demand in the economy.
The lags make the stabilization of policies hard to time correctly. The debate itself is a lag on the part of the policymakers – time wasted to argue out the right kind of policy to implement. The active policy advocates ignore the lags and are ignorant of how the economy works. They, therefore, prefer taking action via monetary of fiscal policies instead of doing nothing. The passive policy advocates view the lags are the as reasons to avoid discretionary policies which may be costly due to such things as loss of output and the prolonging of the unemployment hardships. They, therefore, prefer to rely on the natural ability of the economy to correct itself by stabilizing automatically at one point.
