Topic 9: aggregate demand and aggregate supply Conflicting policies

Students should be able to: Unit content Students should be able to: Evaluate potential policy conflicts and trade- offs

RECAP: What are the seven macroeconomic objectives of a government? Topic 9: aggregate demand and aggregate supply RECAP: What are the seven macroeconomic objectives of a government?

RECAP: what are the main macroeconomic policies? There are two main policy instruments: NOTE: transfer payments refer to money moving from taxpayers to benefit claimants through the social security system

Graph comparing government spending and total tax revenue

What are supply-side and fiscal policies? Do they affect AD or AS? Topic 9: aggregate demand and aggregate supply What are supply-side and fiscal policies? Do they affect AD or AS? Supply side policies are Fiscal policies are

_____________________________________ What is the impact of government spending on education in the short and long term? What happens to inflation? Government spending on education affects _____________________________________ _____________________________________ _____________________________________ This may mean that the price level will So fiscal policy has ___________ effects in the short term and _____________ in the long run.

Why might higher government spending (in general) increase inflation Why might higher government spending (in general) increase inflation? Show this on a diagram

Automatic and discretionary fiscal policies Some government expenditure varies with the business cycle. These are called automatic stabilisers. E.g. if the economy is in a recession then government expenditure will rise and revenue will fall. This automatically helps to offset the effect of the recession. Discretionary policies are therefore when the government deliberately tries to influence the economy The key is whether the economy is at full employment or not.

Why might supply-side and fiscal policies conflict? There are often conflicts between macroeconomic policy objectives E.g. increasing levels of growth may conflict with the aim of ____________________ if aggregate demand outpaces aggregate supply The pursuit of one objective may mean an opportunity cost in terms of another This is referred to as a ____________ where an increase in one area is traded off for a decrease in the other

Interest rates are historically low (0.5%) since March 2009 What is the impact of low interest rates on the distribution of income? Interest rates are historically low (0.5%) since March 2009 http://www.bbc.co.uk/news/uk-14832742 Redistribution of income from savers to borrowers Savers have lost out (£43 billion) – falling real incomes Borrowers have gained (£51 billion) – gain in purchasing power; low interest rates have increased demand for (and hence price of) houses (increased wealth effect). Younger people have lost out Also affects exporters positively (weak £)

Why might interest rates influence the exchange rate and competitiveness?

Topic 9: aggregate demand and aggregate supply Evaluate the macroeconomic effects of the UK government trying to reduce its budget deficit, assuming economic growth remains weak. (20) January 2013