Macro Trade offs/ conflicts

What are the trade offs associated with expansionary fiscal and monetary policy

Evaluate

Achieves: More growth, less unemployment, possibly less income inequality

However: More Inflation, worse balance of payments (Ex less competitive) , worse government finances, possibly more income inequality, negative effects to environment

Evaluation: Output gap - if economy is in a negative output gap (spare capacity) then inflation will be non-existent/ minimal. Nature of growth - SR/ LR sustainable? bubble?. Type of policy used. Classical view that all macro economic policies will be improved and are compatible

What are the trade offs associated with contractionary fiscal and monetary policy

Evaluation

Achieves: Lower inflation, lower income inequality, More tax revenue, Improved balance of payments (Tariffs and exports more price competitive)

At the cost of: Lower growth, higher unemployment, lower labour productivity (Less incentives) less entrepreneurs

Evaluation: If positive output gap then ideal, large negative output gap could have negative ramifications, Laffer curve ideas (Less tax revenue). What policy is used

Trade offs with supply side policy

Evaluation

More growth, Less unemployment, less inflation, better balance of payments

Evaluation: Output gap size - This will boost capacity and will not effect demand (not helpful in a recession), Government finances can take a hit, can worsen income inequality and living standards as incomes may be reduced, environment

Done

Done