1. 3.4.3: Strengths and Weaknesses of These Policies

2. 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

3. 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

4. 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

5. 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

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

7. 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

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