Economic growth
Fiscal policy
Strengths | Weaknesses |
Increase in government expenditures (G), decrease in taxes (T) → increase AD: expansionary fiscal policy → promote economic growth. | Long time lags
• Not effective during a recession. |
Monetary policy
Strengths | Weaknesses |
Decrease in interest rates → increase AD → increase real GDP: promote economic growth. | Limited ability to stimulate growth
• If interest rates are close to 0, then there’s limited scope to decrease interest rates. |
Flexible, incremental, reversible, short time lags: better than monetary policy as a short-run stabilisation tool. | Not effective during deep recession
• Very low consumer and business confidence. |
Supply-side policy
Strengths | Weaknesses |
Public investments in infrastructure, education, healthcare → accelerate economic growth. | Huge opportunity cost. |
Low and stable rate of inflation
Fiscal policy
Strengths | Weaknesses |
Contractionary fiscal policy:
Decrease G, increase T → AD ↓ → inflation ↓ | After excessive government expenditures: Tighter monetary policy → inflationary pressures. |
Monetary policy
Strengths | Weaknesses |
Increase interest rates → price stability. | Ineffective to deal with deflation
• Interest rates are already low (close to 0). |
Supply-side policy
Strengths | Weaknesses |
More flexible labour markets
• Increase productive capacity → reduce inflation. | Long time lags
• Further increase inflationary pressures Takes long time for policies to come into effect. |
Low unemployment
Fiscal policy
Strengths | Weaknesses |
Expansionary fiscal policy
• Cyclical unemployment.
• Deep recession. | Not effective to deal with structural unemployment. |
Monetary policy
Strengths | Weaknesses |
Cyclical unemployment
• Decrease interest rates. | Not effective to deal with structural unemployment. |
Supply-side policies
Strengths | Weaknesses |
Structural unemployment
• Mismatch between the skill of the unemployed and the skills that firms demand.
• Provide training & retraining opportunities. | Decrease unemployment benefits
• Increase income inequality |