A2 Approaches to Macroeconomic Policy

Question 1

Why does the elasticity of the Aggregate Supply Curve matter?

Answer 1

If as according to monetarists (new classical) the macro economy always quickly returns to its natural equilibrium and the AS curve is then vertical at the natural rate, there is no point in the government using expansionary AD policy.

Question 2

What is the monetarist view on wage and price flexibility?

Answer 2

They believe that wages and prices are extremely flexible which is why the economy always rapidly returns to a full level of employment.

Question 3

What is the Keynesian view on wage and price flexibility?

Answer 3

This school believes wages may not always be flexible and may not always adjust to bring about an equilibrium. Wages are even more inflexible downwards. If there is a fall in demand for a product, so the price has decreased, the firm may try to even this out by lowering wages. However, trade unions may make it difficult for firms to lower wages.

Question 4

What is the monetarist view on the role of expectations?

Answer 4

They believe expectations on the future state of the economy will be made quickly and accurately resulting in a quick adjustment to the natural rate of unemployment.

Question 5

Why can expectations be important in influencing firms behaviour?

Answer 5

If inflation is high and unpredictable, firms may have a pessimistic view on the future of the economy and so deter from investing
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