3 4 3 strengths and weaknesses of these policies
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3.4.3: Strengths and Weaknesses of These Policies PowerPoint PPT Presentation


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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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3.4.3: Strengths and Weaknesses of These Policies

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3 4 3 strengths and weaknesses of these policies

3.4.3: Strengths and Weaknesses of These Policies


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


3 4 3 strengths and weaknesses of these policies

  • 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


3 4 3 strengths and weaknesses of these policies

  • 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


3 4 3 strengths and weaknesses of these policies

  • 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


3 4 3 strengths and weaknesses of these policies

  • Imperfectly Functioning Markets

    • Markets won’t clear

      • Need for govt. intervention


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