CH34 Relationships between objectives and policies

Question 1

What are the principle objectives of government policies?

Answer 1

-Maintaining full employment
-Ensuring price stability
-Achieving economic growth
-Strong balance of payments

Question 2

What are the policies to reduce inflation?

Answer 2

-Contractionary monetary policy to raise interest rates
-Contractional fiscal policy to reduce spending

Question 3

What are the downsides towards reducing inflation by policies?

Answer 3

-High interest rates from contractionary will discourage consumers and businesses from borrowing, leading to reduced consumption, AD, economic growth and unemployment.
-High taxes and lower government spending from contractionary could lead to unemployment, people will also suffer from less government aid.

Question 4

What is the possible tradeoff towards reducing inflation for unemployment by monetary and fiscal policies?

Answer 4

• Governments will have to take the higher unemployment to decrease inflation. The use of supply-side measures to reduce inflation avoids rising unemployment through decreasing AD and increasing levels of output, but this is very slow, so governments will use a mix of both.

Question 5

How does using Monetary policy to reduce inflation harm employment rates?

Answer 5

Contractionary Monetary Policy will reduce inflation by increasing interest rates

-High intrest rates will lead to decreased spending and borrowing, leading to decreased AD and Economic growth
- High intrest rates will lead to higher mortgage payments, reducing their purchasing power and increasing unemployment

Question 6

What is the possible tradeoff towards increasing economic growth by using policies?

Answer 6

-firms can’t meet the AD and therefore increase prices and produce more.
-This causes demand-pull inflation, as increased demand for goods would lead firms to charge higher prices
-the government can’t stimulate the economy too much or risk causing inflation. Leading to a tradeoff.
-Supply-side policies are more “business friendly” and would promote growth to help reduce infaltionary pressures while increasing economic growth.

Question 7

What are the downsides of economic growth on protecting thee enviornemtn

Answer 7

Economic growth causes environmental damage with them polluting a lot and taking up land to increase their output.

Question 8

What is the possible tradeoff towards increasing economic growth while protecting the enviornment?

Answer 8

• In struggling countries, many people would prefer damaging the environment to increase economic growth. Using pollution permits, regulations and fines might be a good way to increase economic growth while protecting the environment.

Question 9

What are the downsides of reducing infaltion through monetary policy on the current account balance?

Answer 9

-Contractional monetary policy decreases inflation,
-but in increasing the interest rates would lead to a higher demand for a domestic currency leading to exports becoming expensive and imports cheaper. Leaeding to a current account defecit.

Question 10

What is the possible tradeoff towards reducing inflation by monetary policy on the current account balance?

Answer 10

By using contractionary monetary policy, the government will have to accept the current account worsening

Fiscal policy can reduce inflation with less worsening of the current account balance. If contractional fiscal policy is used, there will be a fall in demand in the economy with no effect on exchange rate. Therefore, prices of imports and exports will be stable.