Macroeconomic Conflicts and Trade-offs Flashcards
What are the features of a successful economy (4)?
1) Steady economic growth.
2) AD rises slightly faster than LRAS to maintain a steady rate of inflation.
3) The government will manage a balanced budget.
4) The government will be able to address the issues of inequality and environment protection, whilst investing in the future of the economy and maintaining full employment.
What are the macroeconomic trade-offs of encouraging economic growth by raising AD (2)?
1) Inflationary pressure is created.
2) Increase in imports, lowering net trade.
What are the macroeconomic trade-offs of reducing inflation through contractionary fiscal policy (2)?
1) Can result in cyclical unemployment.
2) Can cause a recession.
What is the macroeconomic trade-off of improving the current account on the balance of payments by cutting imports?
Any protectionist measures could cause other countries to retaliate, potentially reducing exports.
What is the macroeconomic trade-off of reducing inequality in income and wealth by redirecting income through taxes and government spending?
Disincentivising work, contributing to unemployment.
What are the macroeconomic trade-offs of cutting a fiscal deficit through contractionary fiscal policy (3)?
1) Austerity will raise unemployment.
2) Lower economic growth.
3) Potential for a recession.
What are the macroeconomic trade-offs of lowering unemployment through supply-side reforms (2)?
1) Could create greater inequality.
2) Investment in infrastructure can cause negative externalities in the environment.
What does the Phillips curve show?
The inverse relationship between inflation and unemployment: as unemployment falls, the rate of inflation rises
What are the benefits (1) and trade-offs (2) of expansionary fiscal policy?
Lowering tax and raising government spending will increase AD, however it can create inflationary pressure and a net trade deficit.
What are the benefits (2) and trade-offs of contractionary fiscal policy (2)?
Raising tax and lowering government spending can potentially reduce inflationary pressure and a trade deficit, however it can lower AD, creating unemployment.
What is the main trade-off of environmental policies, and how significant is it?
1) LRAS can shift to the left, lowering economic growth, as environmental policies can increase costs for businesses and lower productivity and efficiency.
2) However, by investing in the protection of the environment, LRAS should be increased compared to a position where market failure is caused by unsustainable business practices as a result of pollution and resource depletion.
What are the benefits (2) and trade-offs (1) of expansionary monetary policy?
Lowering interest rates can boost spending and AD, and increase the price of assets. However, inflationary pressure can be created.
What are the benefits (1) and trade-offs (2) of contractionary monetary policy?
Raising interest rates can reduce inflationary pressure. However, in the long term, high interest rates can damage investment and appreciate the value of a currency, reducing international competitiveness and the ability to export.
What are the general benefits of supply-side policies (2)?
Supply-side policies can increase the productive potential of an economy, creating effective conditions for markets to function through investments in infrastructure and capital goods.
