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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. 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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  1. 3.4.3: Strengths and Weaknesses of These Policies

  2. 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

  3. 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

  4. 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

  5. 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

  6. C. Peoples Expectations are Rational • People will see that inflation is eroding real wages.

  7. 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

  8. Imperfectly Functioning Markets • Markets won’t clear • Need for govt. intervention

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