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3.4.3: Strengths and Weaknesses of These Policies

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3.4.3: Strengths and Weaknesses of These Policies. Demand-Side Strengths. Monetary and Fiscal Policies Tools to influence Economic Activity/Output Unemployment Inflation Trade Balance /Exchange Rates Automatic Stabilisers Minimize volatility Discretionary Fiscal Policies

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demand side strengths
Demand-Side Strengths
  • Monetary and Fiscal Policies
    • Tools to influence
      • Economic Activity/Output
      • Unemployment
      • Inflation
      • Trade Balance /Exchange Rates
  • Automatic Stabilisers
    • Minimize volatility
  • Discretionary Fiscal Policies
    • Allow govt. to steer socio-economic goals
    • Social redistribution
demand side weaknesses
Demand-Side Weaknesses

1. Trade-off problems

  • Unemployment vs. inflation
  • inflation vs. growth
  • Deficit spending vs. unemployment
  • Growth vs. trade balance
  • Interest rates vs. exchange rates
slide4
2. Time lags and Political Influences
    • Govts can make things worse
    • “Fine tuning” doesn’t work because of lags
      • Identification lags
      • Implementation lags
      • Effect/Impact lags
        • Might be worse than expected
slide5
3. Classical Economists Critique
    • A. Inflation vs. Long Run Growth
      • Lowering inflation (Demand-side effective)
      • Increasing Growth (Supply-side effective)
        • Lowering unemployment
    • B. D-Side Policies lessen Efficiency
      • Govt. spending inefficient
      • Production incentives more effective
        • Lasting benefits to economy
        • Increased LR output
        • Market clearing full-employment
slide6
C. Peoples Expectations are Rational
    • People will see that inflation is eroding real wages.
weaknesses of supply side
Weaknesses of Supply-Side
  • Negative Effects on Society
    • Poor, uneducated
    • Older workers
  • Incentive Function of Tax Cuts is Limited
    • Opportunity Costs
      • Social Costs
        • Increase Budget Deficits
        • Less transfer payments for poor
        • SR increased unemployment (lower AD)
        • Income distribution inequality
        • Hurts long run potential
slide8
Imperfectly Functioning Markets
    • Markets won’t clear
      • Need for govt. intervention
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