Govt Policy

Question 1

Fiscal

Answer 1

Goals:
Low and stable inflation
Low unemployment
Promote a stable economic environment for long-term growth
Reduce business cycle fluctuations
Equitable distribution of income
External balance (exports vs imports)

Strengths:
The ability for a government to promote economic activity during a deep recession or time of specific need
The ability to target specific sectors
Redistribution of income and equity
Achieving macroeconomic objectives
Automatic stabilizers (HL)
The multiplier effect (HL)

Constraints/Weaknesses:
Political pressures - getting agreement on details of the policy
Time-lags - the time it takes to recognise that intervention is needed, the time it takes to complete the administration involved in order to implement/ roll-out the policy, the time it takes for the policy to have an impact/ see a change
Conflicting objectives/ unintended consequences e.g raising taxes can affect incentives to work, economic growth may conflict with inflation
Assumes efficiency and competency from a government
Opportunity cost - spending on this versus other priorities
Sustainable debt the extent to which a government can afford to sustain a budget deficit. Also, the interest cost impacts future spending.
Crowding out (HL)

Question 2

Monetary

Answer 2

Goals:
The maintenance of a low and stable rate of inflation, usually tied in with ‘inflation targeting’ where the central bank sets a specific medium-term inflation rate as a goal
A low unemployment rate
A stable economic environment for long-term growth
Reduce fluctuations in the business cycle
Achieve an external balance between export revenue and import expenditure

Strengths:
It is relatively quick to put into place - (the central bank can usually change the interest rate each month if they wish, or faster if really needed)
There is limited political intervention - when a central bank is independent of the government they can make politically unpopular decisions and do not have to go through a political process to change them
An absence of “crowding out” - HL concept
The ability to make small changes - interest rates can be changed by a quarter of a percent which allows more fine-tuning of an economy
It does not cost the government money to implement

Weaknesses:
Time lags- even though interest rates can be changed quickly it takes time for them to have an effect. Some sources state that it takes an estimated 12-18 months to see a change in AD from a change in interest rates
Ineffectiveness when interest rates are low- as interest rates become very low and approach zero they become ineffective as a policy tool as they can no longer be lowered any further
Low consumer and business confidence - if consumer and business confidence is low due to a recession for example, the lowering of interest rates may have little effect
Dependent on ease of borrowing- even in interest rates are low, if banks are unwilling to lend and/or make it difficult to borrow, there will be a limited effect on AD

Question 3

Supply-side

Answer 3

Positives -
Both: If managed properly, public support of private enterprise can be highly efficient and effective with improved resource allocation
Both: End result is improved potential output, which has numerous benefits
Both: Ability to create employment
Both: Ability to reduce inflationary pressures
Both: Can be easily targeted at specific programs, industries
M: usually have small to no impact on government budget
I: may have a positive impact on equity

Negatives -
Both: Policies will face time-lags - government decisions and time for policy to make impact (interventionist worse than market-based)
Both: Governments may change, risking waste of money if they abandon or change policies
Both: Interference from vested interests
M: Some policies may negatively impact short-term employment
M: Some policies may negatively impact equity (favoring producers, not employees)
I: For G spending or tax reduction impacts the budget and has opportunity costs