KK20 - The Strengths and Weaknesses of using BP

Question 1

Strengths of BP

Answer 1

-Can target particular areas in the economy
-Shorter impact lag in comparison to MP (changes in cash rate takes a few months to effect the economy, whilst BP influences discretionary incomes immediately (in some cases))
-Relatively efficient at stimulating AD (influences G, C and I)

Question 2

Weaknesses of BP

Answer 2

-The implementation lag for discretionary policy can be long (areas like infrastructure can take a while to build up)
-It is prone to political bias (poor policy decisions as parties try to win votes)
-Less effective at restricting AD during boom as does not have as much an influence on restricting discretionary income quickly
-Does not change as often as MP (inflexible)