3.4.3: Strengths and Weaknesses of These Policies

Demand-Side Strengths Monetary and Fiscal Policies Tools to influence Economic Activity/Output Unemployment Inflation Trade Balance /Exchange Rates Automatic Stabilisers Minimize volatility Discretionary Fiscal Policies Allow govt. to steer socio-economic goals Social redistribution

Demand-Side Weaknesses 1. Trade-off problems Unemployment vs. inflation inflation vs. growth Deficit spending vs. unemployment Growth vs. trade balance Interest rates vs. exchange rates

2. Time lags and Political Influences Govts can make things worse “Fine tuning” doesn’t work because of lags Identification lags Implementation lags Effect/Impact lags Might be worse than expected

3. Classical Economists Critique A. Inflation vs. Long Run Growth Lowering inflation (Demand-side effective) Increasing Growth (Supply-side effective) Lowering unemployment B. D-Side Policies lessen Efficiency Govt. spending inefficient Production incentives more effective Lasting benefits to economy Increased LR output Market clearing full-employment

C. Peoples Expectations are Rational People will see that inflation is eroding real wages.

Weaknesses of Supply-Side Negative Effects on Society Poor, uneducated Older workers Incentive Function of Tax Cuts is Limited Opportunity Costs Social Costs Increase Budget Deficits Less transfer payments for poor SR increased unemployment (lower AD) Income distribution inequality Hurts long run potential

Imperfectly Functioning Markets Markets won’t clear Need for govt. intervention