economic policies

Question 1

What are the conflicts of fiscal policy? [2]

Answer 1

• Redistribution of Wealth: High-income earners and businesses may resist higher taxes arguing that they reduce investment incentives
• Public spending priorities: trade-offs in spending priorities often lead to disagreements among stakeholders such as education advocates vs defence proponents

Question 2

What are trade-offs of fiscal policy?

Answer 2

• Economic growth vs public debt: increasing gov spending can stimulate growth but may lead to higher debt levels which could burden future generations. E.g. post COVID-19 stimulus packages increased public debt in many economies.
• Short-term Relief vs Long-term Goals: policies such as tax cuts may provide short-term relief but reduce funding for long-term investments such as infrastructure

Question 3

How can monetary policy cause conflicts? [2]

Answer 3

• Inflation vs Employment: Central banks aim to maintain price stability, but measures to control inflation can increase unemployment.
• Borrowers vs Savers: Low interest rates benefit borrowers but harm savers by reducing returns on savings.

Question 4

What are the trade-offs in monetary policy? [2]

Answer 4

• Economic growth vs inflation control: expansionary monetary policy boosts growth but risks higher inflation. Contractionary curbs inflation but may slow growth.
• Domestic stability vs exchange rate stability: efforts to stabilise domestic inflation or employment can conflict with maintaining stable exchange rates, especially in open economies

Question 5

How can supply-side policy cause conflict? [2]

Answer 5

• Labour Market Reforms: policies such as reducing trade union power or introducing flexible labour contracts aim to increase efficiency but may face resistance from workers and unions. Workers may view these measures as reducing job security and wages, while businesses see them as essential for competitiveness.
• Privatisation and Deregulation: privatising state-owned enterprises or deregulating industries can boost efficiency but may lead to inequality or reduced access to essential services.

Question 6

What are the trade-offs in supply-side policy? [2]

Answer 6

• Short-term Pain vs Long-term Gain: structural reforms involve short term disruptions such as unemployment to achieve long term benefits such as improved productivity. E.g. reforms in Greece during eurozone crisis led to austerity measures that sparked widespread protests
• Efficiency vs equity: policies aimed at increasing market efficiency may widen income disparities creating tensions between different social groups

Question 7

What are some trade-offs in trade policy? [2]

Answer 7

• Domestic jobs vs global efficiency: protecting domestic jobs through tariffs can reduce global economic efficiency by distorting market mechanisms
• Short-term Benefits vs Long-term relations: trade restrictions may provide short-term benefits but harm long-term diplomatic and economic relationships