Problems of policy

Question 1

Lags - Monetary Policy

Answer 1

Identification - requires economic research

Implementation - Very quick (once a month)

Impact - Long length 18-24 months

Question 2

Lags - Fiscal Policy

Answer 2

Identification - Political factors to be considered

Implementation - Can be slow and inflexible. Budgets once a year

Impact -Quick, fairly certain and easily targeted

Question 3

Conflicting Objectives

Answer 3

Decrease price stability – Increase economic growth

Decrease price stability – Increase full employment

Extremely difficult especially in the short run to achieve all economic objectives simultaneously

Question 4

Assessing state of the economy

Answer 4

Difficult to obtain an accurate assessment of the performance of the economy and likely future trends

Question 5

Political considerations

Answer 5

Want to be re-elected or other political reasons

Question 6

Pros of Monetary policy

Answer 6

• Changes can be done incrementally
• Changes are reversible
• Is flexible
• Central Bank independence
• Limited political constraints
• No creation of debt
• No Crowding Out

Question 7

Cons of Monetary policy

Answer 7

• Ineffective during deep recession
• Conflict between objectives
  May be Inflationary
• Difficulties in dealing with Supply-side issues – stagflation, cost push inflation
• Can-not be targeted

Question 8

Pros of Fiscal Policy

Answer 8

• Pulling an economy out of deep recession
• Ability to target sectors
• Direct Impact of government spending
• Dealing with rapid inflation
• Ability to impact potential output

Question 9

Cons of Fiscal Policy

Answer 9

• Problems of time lags
• Political Constraints
• Sustainable Debt
• Difficulties in dealing with - Supply-side issues – stagflation, cost push inflation
• Inability to fine-tune economy
• May be inflationary
• Tax cuts may be ineffective during recessions
• Crowding out