Government Macroeconomic Policies

Question 1

Name 2 Pros of Monetary Policy

Answer 1

• Designed to increase the Liquidity of an economy
• Effects currency without direct impact
• The Bank of England acts independently from the Government, which means it doesn’t have a political motive

Question 2

Name 2 Cons of Monetary Policy

Answer 2

• Policy Trade-offs such as higher Demand-Pull inflation or worsening the Current Account position
• There is a negative impact on savers and pensioners
• The time-lags associated with the change in an Interest Rates of around 6-12 months
• There is a level of confidence required within the economy

Question 3

What are some of the Evaluation points of Monetary Policy?

Answer 3

• Paradox of Thrift and the Liquidity Trap
• The Confidence (Business and Consumer) in the economy
• Are banks willing to pass on the cut to consumers?
• The size of the rate cut, and whether it was expected
• Wider state of the economy

Question 4

Name 2 Pros of Fiscal Policy

Answer 4

• Stimulant of AD, can be increased by a multiplier
• Government revenue from taxations
• Government Spending can encourage Long-Run Economic Growth
• Can act as an automatic stabiliser, which can reduce the volatility of the Economic Cycle

Question 5

Name 2 Cons of Fiscal Policy

Answer 5

• Policy Trade-offs such as higher Demand-Pull inflation or worsening the Current Account position
• Worsening of Government Finances if Government Spending > Taxation
• X-Inefficiency as Spending may be Wasteful and not targeted
• Time-lags that can occur

Question 6

What are some of the Evaluation points of Fiscal Policy?

Answer 6

• ‘Crowding Out’ Effects, is it Crowding-In or Crowding-Out?
• Ricardian Equivalence
• Laffer Curve Theories
• Size of the Multiplier
• Short-Run Vs Long-Run returns
• State of Government Finances

Question 7

Name 2 Pros of Supply-Side Policies

Answer 7

• Increases the Productive Capacity of the nation, as investment in LRAS means nations can produce more
• Increase in Human Capital via education spending, improving the Productive Capacity
• When demand-side is exhausted, these policies can be useful
• Non-inflationary Pressures when on the Supply-Side

Question 8

Name 2 Cons of Supply-Side Policies

Answer 8

• No guarantee of Policies being successful
• Time consuming, as it won’t work immediately
• Often expensive to keep up
• Need to target the policy specific to the problem

Question 9

What are some of the Evaluation points of Supply-Side Policy?

Answer 9

• Has the Demand-Side been exhausted?
• Weigh up Short-Run Costs and Long-Run Benefits
• The size of the Output Gap
• The type of SSP, Interventionist or Free Market?
• Wider State of the economy, Price Level…