Conflicts & Trade-offs

Question 1

inflation too high

Answer 1

decrease AD by reducing C spending
BUT- … recession & cyclical unemployment
(recession = neg rate of econ growth for 2 consecutive sectors

Question 2

Growth too low

Answer 2

increase AD … decrease unemployment
BUT- increase inflation & increase M bc incomes rise

Question 3

Unemployment too high

Answer 3

increase AD
BUT - increase inflation

Question 4

Fiscal deficit too high

Answer 4

decrease spending & increase taxes
BUT- increase unemployment & decrease rate of econ growth … recession

Question 5

Conflicts & trade-offs between econ policies
Expansionary & contractionary policy conflict

Answer 5

-EF/M … increase ST rate of econ growth & decrease unemployment
BUT - increase inflation & current acc deficit bc increase M D

-CF/M … decrease inflation & increase current acc surplus
BUT- decrease ST rate of econ growth & increase unemployment

Question 6

interest rate - monetary policy conflicts

Answer 6

increase IR to decrease D pull inflation
- BUT - raise IR to high … damage LT I/Growth
- increase value of currency against foreign ex currencies = SPICED … no X led growth

Question 7

S side policy conflicts

Answer 7

increase productive potential of economy in LR
BUT- increase I in physical capital … increase AD & inflation