2.1.3 Relationship Between Objective And Policy

Question 1

Disadvantages of increasing interest rates to reduces inflation

Answer 1

Hugh interest rates will discourage borrowing which can lead to&raquo_space;fall in consumption and investment&raquo_space; fall in demand and economic growth&raquo_space; higher unemployment

Hugger mortgage for households which reduces spending power&raquo_space; lower AD. Firms may lay off staff

Hugh costs for firms so less profits» invest less&raquo_space; AD decrease

Discourage firms to borrow to invest in new technology and expansion»

Higher interest rates result in higher exchange rates do it may be harder to sell abroad

Question 2

Disadvantages of using fiscal policy for inflation

Answer 2

Higher taxes and lower government spending may lead to lower consumption» lower demand so they need to cut off production by laying off workers > unecomployemt

People may suffer from government cut offs such as NHS waiting time may rise and infrastructure lost

Question 3

What are possible trade offs in unemployment and inflation

Answer 3

Government may have to accept higher levels of unemployment if inflation is reduced
Use of supply side policy may avoid rising unemployment but they are slow to have impact.

Question 4

Policies used to promote growth

Answer 4

Expansionary fiscal means people have more money to spend

Expansionary monetary

Question 5

Possible trade off between economic growth and inflation

Answer 5

Too much growth means the economy may become overheated so firms may not be able to respond to rising demand so they will just increase prices» demand pull inflation

If factors of production immobile or limited capacity&raquo_space; inflation
Supply side policy can help by training that specific capacity to produce more output and meet with the demand

Question 6

Growth and the environment

Answer 6

As businesses produce more output&raquo_space;> likely to be more emissions from lower generators and other manufacturers
As wealth and income increases people buy more cars

Land is taken so less wildlife

Question 7

Trade offs with environment and economic growth

Answer 7

Many people argue that the price paid by sacrificing environment is worth it

Government have used measures to protect environment but do not restrict business development to not ruin spirit

Question 8

Inflation and current account

Answer 8

If prices rise the price of exports will also rise this means that demand for exports will reduce
Monetary policy

Question 9

Trade offs between current account and inflation