Policies to boost economic growth Flashcards
How can we boost short run growth (AD)?
Expansionary fiscal policy by increasing GS or reducing Taxation
Expansionary monetary policy by cutting interest rates.
They will shift AD to the right closer to YFE
Evaluation of policies to boost short run growth?
Conflict of objectives.
Yes there will be growth but also demand pull inflation, eroding purchasing power. Also if negative output gap is large, then risk of inflation is not as bad.
Also trade deficit trade off. Imports
Gov finances.
Fiscal policy can weaken the gov finances, which can affect future generations.
Confidence.
Eg: tax cuts. If confidence is low especially in a recession, this policy wont be as effective
Time Lags.
Takes time to see the effects. EG: GS
Why may we need long run growth and how do we boost it (LRAS)?
If we are close to YFE, we need long run growth to increase spare capacity.
Supply side policies through interventionist or market based.
Evaluation of policies to boost long run growth?
No guarantee of success.
Cost.
Can be very costly, especially interventionist.
Time lags.
We may not see the immediate effects for some polices.
Negative stakeholder effects.
Especially market based. May impact workers and their living standards.
Overall evaluation.
Policies we need depends on the type of growth.
Also we want strong, sustained, and sustainable growth. So we must ensure the policies meet this need.
