Macro 18 - conflict between macro objectives

Question 1

what is the problem?

Answer 1

to achieve one macro objective, another one is harmed.

Question 2

explain the conflict that arises when the government uses expansionary fiscal policy?

Answer 2

Aim: prevent negative output gaps and create growth.
conflict:
1. demand pull inflation if there is limited capacity.
2. budget deficit widens due to more imports and less exports due to higher prices.
3. environmental damages due to increasing non renewable energy usage.

Question 3

explain the conflict that arises when the government uses contractionary fiscal policy?

Answer 3

Aim: prevent inflation.
Conflict:
- creates negative output gaps.
- reduces real gdp and economic growth.

Question 4

explain the conflict that arises when the government uses expansionary monetary policy?

Answer 4

Aim: designed to prevent negative output gaps, lower unemployment and create growth.
conflict:
- Demand pull inflation.
- damage international competitiveness.
- higher inequality - benefit of growth goes disproportionately to the wealthy and owners of capital

Question 5

how can these conflicts be avoided?

Answer 5

• growth and inflation is achievable at the same time through the use of supply side policies as it creates spare capacity.
• policies such as privatisation and deregulation creates competitions and incentivises firms to lower watch.

Question 6

what policy would be most effective in overcoming cyclical unemployment?

Answer 6

• Fiscal and/or monetary policy will shift right AD and be effective.
• G will be more effective than tax cuts because spending will directly affect AD, because leakages will occur with tax cuts.
• Tax cuts are also harder to justify.

Question 7

what policy would be most effective in overcoming structural and frictional unemployment?

Answer 7

• Supply side policies would be most effective.
• Information information about jobs.
• offer more training opportunities.
• increase economics incentives, by increasing MW or reduce benefits.
• relax rules of firing and hiring.

Question 8

what policy would be most effective in controlling cost push inflation?

Answer 8

supply side policies - either cut corporation tax or grant subsidies, this reduces price levels.

Question 9

what policy would be most effective in controlling demand pull inflation?

Answer 9

contractionary fiscal policy or monetary policy.

Question 10

what policy ensure low inflation in the long run.

Answer 10

supply sides policies - ensure productive capacity is growing as fast as AD.