Question

Macroeconomic policy is about making difficult decisions involving tradeoffs.Examples of these tradeoffs.Interpret it.(350 words) No written responses please, only typed.

Answer 1

1. Macroeconomic Policy:- Macroeconomic policy focus to allow a solid economic enviroment that is potential to promote strong and durable economic growth. The main factors of macroeconomic policy are,

• Fiscal Policy.

• Monetary Policy.

• Exchange Rate Policy.

It is concerned with the working of the economy as a whole.

2. Tradeoffs:- Trade off is an exchange where we give up one thing in order to get something else that we also desire.

3. Examples of tradeoffs:- Some examples of trade offs are following:-

a) If the government tries to increase AD by applying expansionary fiscal policy, we will get an increase in GDP and therefore lower unemployment but at the cost of excessive inflation. This is an example of a trade-off between economic growth, unemployment vs inflation.

Diagram-1

b) In short term there is trade-off which can be shown with a phillips curve.

Diagram-2

c) If the government wants to keep the value of the exchange rate fixed, then the government will be forced to intervene through increasing interest rates or buying currency. This cause exchange rate stability vs economic growth trade-off situations.

d) Another example of trade off between economic growth and the effect on the environment and living standards.

e) A quite different example of trade off between equity and efficiency.

f) Another example of trade off is consumption vs investment.

g) In macroeconomics, trade off between the private sector vs public sector is best example.