Conflicts And Trade Offs Between Objectives And Policies Flashcards
What are some policies to increase growth? SHORT RUN AND SHOW ON A DIAGRAM
Short run growth:
IF ECONOMY HAS LOW AD OR IN RECESSION- need increase short run growth via increase AD.
Policies: expansionary fiscal/monetary policy.
EVALUATE POLICIES TO INCREASE SHORT RUN GROWTH
Conflict of objectives- higher economic growth which may bring down unemployment however it may increase demand pull inflation which means inflation overshoots inflation target. Depends on size of output gap. INCOMES RISING MORE SPENDING ON IMPORTS WHICH WIDENING OUR CURRENT ACCOUNT DEFICIT.
Consumer and business confidence- limits effectiveness
Time lags
What are policies to increase growth. Long run growth
SUPPLY SIDE POLICIES. EVALUATION OF SUPPLY SIDE POLICIES
WHAT HAPPENS WHEN POLICY MAKERS USE EXPANSIONARY FISCAL POLICY TO IMPROVE ECONOMIC GROWTH? CONFLICTS WITH ECONOMIC GROWTH?
ECONOMIC GROWTH CONFLICTS WITH:
INFLATION RATE OF 2 PERCENT: WHY BECAUSE ECONOMIC GROWTH MEANS Lower taxes, greater disposable income, increased consumption
Additional multiplier effects. More consumption, more revenue for business owners, more employment, consumption increases. Shown by graph as AD increases. Increases real gdp.
HOWEVER, THESE SHIFTS ALSO LEAD TO A SUSTANED INCREASE IN GENERAL PRICE LEVEL, WHICH LEADS TO INCREASED INFLATION MEANING MACROECONOMC OBJECTIVE OF 2 PERCENT IS NOT MET.
ALSO, REDUCED INEQUALITY:
Lower taxes, government gets less money in tax revenue, less money to spend on benefits, less cash on public services. TAX CUTS MEAN RICHER PEOPLE HAVE HIGHER INCOMES MEANING GAP BETWEEN RICH AND POOR WIDEN.
INCREASED GROWTH CAN ALSO CONFLICT OBJECTIVE OF A CURRENT ACCOUNT EQUILBRIUM.
Growing economy attracts foreign investment, rise in demand for currency, increase strength of pound, foreign goods become cheaper for domestic customers. domestic goods become more expensive to foreign customers. Increase in imports, decrease in exports and creation of current account deficit.
What are the conflicts between economic growth and environmental sustainability?
The government can increase economic growth through expansionary fiscal policy however this leads to a conflict with environmental sustainability.
Reducing taxes means people wealthier so consume more goods and services so buy and drive more cars, travel abroad on jumbo jets and may eat more meat. These activities require more energy meaning burning of fossil fuels meaning releasing carbon dioxide into the atmosphere meaning climate change and global warming.
SUPPLY SIDE POLICIES:
New rail line ( infrastructure projects) REQUIRES HEAVY INDUSTRY
HEAVY INDUSTRY BURNS HUGE AMOUNTS OF FOSSIL FUELS, RELEASING CARBON DIOXIDE, CONTRIBUTING TO CLIMATE CHANGE.
How do we evaluate conflict between economic growth and environmental sustainability
- Economists argue it doesnt conflict because they argue economic growth enables companies to make profits this incentive eocnurages innovations that enable humans to reduce carbon dioxide emissions
- Economic growth helps an economy move from being a manufacturing to a service economy. This change means that the economy will be more environmentally sustainable .
What are the conflicts between budget equilibrium and unemployment
How to achieve full employment: Expansionary fiscal policy
Lower taxes, higher spending, higher consumption, increases AD. SHOWN ON GRAPH. Then means increased in derived demand for labour.
Supply side policies:
Hs2 rail-link which creates lots of jobs. ( 30,000 jobs)
HOWEVER:
Increased government spending and lower taxes leads to a budget deficit . So, governments need to borrow by selling government bonds. And, this will lead to an accumulation or increase of government debt. CONFLICT BETWEEN ECONOMIC GROWTH AND KEEPING A BALANCED BUDGET
Evaluate economic growth and balanced budget:
Short run vs long run- short run yes there will be increase in budget deficit but long run this deficit will close. This is because with full employment the government spends less on unemployment benefits so less government spending. Low unemployment means more tax revenues. As economic growth there is increased consumption. Increased consumption means bigger tax revenues through VAT and corporation tax.
What are the conflicts between unemployment and inflation?
When unemployment is lower, firms have to fight over the few remaining unemployed people if they want to hire someone new. This means that the remaining unemployed people have lots of bargaining power which can be used to increase wages. With higher wages, firms will increase their prices , so that they can still make a profit despite the higher wage costs.
HIGHER WAGES PUSH UP COSST WHICH MEANS FIRM PUSHES UP PRICES WHICH INCREASES PRICE LEVEL WHICH IS INFLATION. LOWER UNEMPLOYMENT CAN LEAD TO HIGH INFLATION.
What does a Phillips curve show
The Phillips Curve shows the trade off between inflation and unemployment.
How can we evaluate the Phillips curve
