Conflicts between macroeconomic policies

Conflicts between macroeconomic policies

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What are the three macroeconomic policies?

Demand Side Policies – Shifts in AD

  1. Fiscal Policy – Government Spending & Taxation
  2. Monetary Policy – Interest Rates & Money Supply

 

  1. Supply Side Policy – AS shifts to the right

Short Run – Caused by a change in the cost of production

  • Oil
  • Wages
  • Corporation Tax

Long Run – Caused by a change in the quality, quantity and efficiency of the factors of production (Land, Labour, Capital and Enterprise)

  • Education & Training 
  • Migration
  • Healthcare

How do these policies conflict with each other?

Conflict 1 – Fiscal and Monetary Policy

Expansionary fiscal policy would mean that the government spending is higher than the taxation collected. This would lead to aggregate demand shifting to the right and causing demand-pull inflation. In order to counter the higher levels of inflation, the MPC could use contractionary monetary policy by increasing interest rates. This would cause a decrease in consumption and investment shifting the AD curve to the left reducing prices. 

Therefore, expansionary fiscal policy could cause a conflict as the MPC would have to use contractionary monetary policy to control inflation (vice versa).

 

Conflict 2 – Monetary and Supply-Side Policies

Contractionary monetary policy means an increase in interest rates. This will make the cost of borrowing higher for firms increasing their cost of production. This will cause the aggregate supply curve to shift to the left, causing a conflict between both monetary and supply-side policy.

 

Conflict 3 – Supply-side policy and fiscal policy 

A change in supply-side policy will have an impact on the government’s fiscal budget. 

An increase in supply-side policies such as education and training will cause government spending to increase. Supply-side policies will increase the government’s budget deficit in the short term for training and education but reduce it in the long run as these graduates will become more skilled, earn higher salaries and pay larger taxes.

Tushar Depala

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