contractionary fiscal/monetary policy conflicts

what does contractionary fiscal or monetary policy mean

raise tax, cut gov spending, raise I.R

what’s the trade off between economic growth

-contractionary policy means that AD will shift left, so REAL GDP falls BUT if its at full employement firms cant produce more so AD fall reduces prices not output which improve net exports

what’s the trade off between unemployment

-when unemployment rises AD falls causing cyclical unemployment BUT if economy is already at full unemployment firms may not fire as many workers as they still need them

-unemployment may not occur in every area

what’s the trade off between low and stable inflation

-contractionary policy reduces AD so with fewer people buying goods firms stop raising prices so less demand pull inflation BUT if there’s lots of spare capacity then inflation will fall a lot

what’s the trade off between CA(net exports)

-when gov raise tax the AD falls so PL falls so UK goods are cheaper compared to others so UK X more competitive and less M BUT depends on PED of M/X

what’s the trade off between low inequality

-when AD falls firms produce less so workers are fired so AD shifts left BUT the wealthy experiences a greater proportion of fall in income, unemployment might not occur in every sector

-also is welfare benefits are strong then not too much inequality

what’s the trade off between improved fiscal position

-high tax and low gov spending reduces budget deficit so improves it BUT if unemployemnt increase then gov needs to spend more on benefits

-also when AD falls people spend less less VAT so tax rev falls so worsen deficit

-negative multiplier effect

what’s the trade off between development

-when AD falls less people in work, income fall, GDP falls= more people in poverty BUT many developing countries rely on agriculture which causes lots of air pollution but with contractionary it reduces output so pollution decreases