Macro policy objective tradeoffs

• What are the major macro objectives that can be achieved through macro policy?

  Core objectives include growth, unemployment, inflation, and trade.
• What are some additional macro objectives beyond the core ones?

  Fair distribution of income, sound stable government finances, high labor productivity, and environmental sustainability.
• What are the components of expansionary fiscal and monetary policies?

  • Expansionary fiscal policy: cuts in taxation and increases in government spending.
  • Expansionary monetary policy: cuts in interest rates and increases in the money supply through quantitative easing.
• What is the goal of expansionary fiscal and monetary policies?

  The goal is to shift aggregate demand (AD) to the right.
• What macro objectives can be achieved through expansionary demand-side policies?

  Higher growth, lower cyclical unemployment, and potentially a reduction in income inequality.
• How can fiscal policies reduce income inequality?

  Through higher government spending on benefits, education, and training, or cuts to regressive taxation.
• What are the potential trade-offs of expansionary fiscal and monetary policies?

  Higher demand for inflation and potential current account deficits.
• How can higher growth lead to inflation?

  Higher growth can increase demand, which may lead to higher prices.
• What is the relationship between higher growth and current account deficits?

  Higher growth can lead to increased spending on imports, worsening the current account position.
• How can expansionary fiscal policies impact government finances?

  They could worsen government finances due to increased spending and potential tax cuts.
• What factors can lead to higher income inequality during periods of growth?

  If growth is capital-intensive, one sector dominant, or if it creates poor quality jobs.
• What are some negative environmental impacts associated with higher growth?

  Increased air pollution, resource degradation, and loss of biodiversity.
• How does the nature of growth affect environmental concerns?

  If growth is services or tech dominant, environmental concerns may be less significant.
• What determines whether trade-offs from macro policies are guaranteed?

  It depends on the size of the output gap.
• What happens to the inflation trade-off in a large negative output gap?

  The inflation trade-off is less likely in a situation with a large negative output gap.
• What is the classical view on macro objectives during a recession?

  They argue that wages will eventually fall, allowing the economy to self-heal without expansionary fiscal policy.
• What are contractionary fiscal and monetary policies aimed at achieving?

  They aim to reduce aggregate demand.
• What are the components of contractionary fiscal and monetary policies?

  Increases in taxation and cuts to government spending for fiscal policy; higher interest rates and cuts to quantitative easing for monetary policy.
• What macro objectives can be achieved through contractionary demand-side policies?

  Lower rates of demand for inflation, improvements in the current account position, and improvements in government finances.
• How can higher taxation on high-income individuals reduce income inequality?

  Through a progressive income tax system that redistributes wealth.
• What are the potential trade-offs of contractionary fiscal and monetary policies?

  Lower growth, higher cyclical unemployment, and potential recessionary impacts.
• How can higher income taxes affect labor productivity?

  Higher income taxes can reduce incentives to work and be entrepreneurial, leading to lower productivity.
• What is the relationship between the size of the output gap and the trade-offs of contractionary policies?

  A small negative output gap may not significantly impact growth and unemployment, while a large negative output gap will lead to significant reductions in growth and increases in unemployment.
• What are Laffer curve concerns related to direct taxes?

  Higher direct taxes may reduce incentives to work and lead to tax evasion or avoidance, limiting the benefits of contractionary fiscal policies.
• How can supply-side policies impact macro objectives?

  They aim to boost long-run aggregate supply (LRAS) and improve macro objectives like growth, unemployment, inflation, and current account position.
• What are the two types of supply-side policies?

  Market-based and interventionist supply-side policies.
• What is the expected outcome of successful supply-side policies?

  Higher long-term growth rates, lower unemployment, and lower long-term rates of inflation.
• How can supply-side policies improve the current account position?

  By making exports more internationally competitive through lower long-run costs of production.
• What factors determine whether the benefits of supply-side policies are realized?

  It depends on the size of the output gap and the economic conditions at the time.
• What do Keynesians argue about supply-side policies during a deep recession?

  They argue that demand-side policies are needed instead of supply-side policies to increase growth and reduce unemployment.
• What are the potential negative impacts of interventionist supply-side policies?

  They can damage government finances and create conflicts with macro objectives.
• How can market-based supply-side policies affect income inequality?

  They can worsen income inequality and living standards, especially for those on lower incomes.
• What environmental concerns can arise from market-based supply-side policies?

  Deregulation can lead to environmental trade-offs, such as increased pollution and resource depletion.
• What is the overall conclusion regarding macro policy trade-offs?

  There are significant trade-offs that can occur with macro policies, and understanding these is crucial for effective economic management.