3.4.3: Strengths and
Weaknesses of These
Policies
Demand-Side Strengths
 Monetary and Fiscal Policies
– Tools to influence




Economic Activity/Output
Unemployment
Inflation
Trade Balance /Exchange Rates
 Automatic Stabilisers
– Minimize volatility
 Discretionary Fiscal Policies
– Allow govt. to steer socio-economic goals
– Social redistribution
Demand-Side Weaknesses
1. Trade-off problems
– Unemployment vs. inflation
– inflation vs. growth
– Deficit spending vs. unemployment
– Growth vs. trade balance
– Interest rates vs. exchange rates
 2. Time lags and Political Influences
– Govts can make things worse
– “Fine tuning” doesn’t work because of lags
 Identification lags
 Implementation lags
 Effect/Impact lags
– Might be worse than expected
 3. Classical Economists Critique
– A. Inflation vs. Long Run Growth
 Lowering inflation (Demand-side effective)
 Increasing Growth (Supply-side effective)
– Lowering unemployment
– B. D-Side Policies lessen Efficiency
 Govt. spending inefficient
 Production incentives more effective
– Lasting benefits to economy
– Increased LR output
– Market clearing full-employment
 C. Peoples Expectations are Rational
– People will see that inflation is eroding real
wages.
Weaknesses of Supply-Side
 Negative Effects on Society
– Poor, uneducated
– Older workers
 Incentive Function of Tax Cuts is Limited
– Opportunity Costs
 Social Costs
–
–
–
–
–
Increase Budget Deficits
Less transfer payments for poor
SR increased unemployment (lower AD)
Income distribution inequality
Hurts long run potential
 Imperfectly Functioning Markets
– Markets won’t clear
 Need for govt. intervention