POLICIES TO REDUCE UNEMPLOYMENT (IGCSE 0455)

Effect on
Type of Policy Policy How It Works Risks
Unemployment

Government increases spending

Demand-Side (for Firms hire more Inflation, higher
or cuts taxes → AD increases →
cyclical Fiscal Policy workers → government
firms receive more orders →
unemployment) unemployment falls debt
output rises

Interest rates reduced →

Firms hire more
borrowing cheaper → spending Demand-pull
Monetary Policy workers →
and investment increase → inflation
unemployment falls
output rises

Supply-Side (for
Education and Workers gain skills → better job Structural Expensive, takes
structural
Training matching → higher productivity unemployment falls time
unemployment)

Reduce
Voluntary May increase
Unemployment Increases incentive to seek work
unemployment falls poverty
Benefits

Reduce Minimum Lowers cost of employing Firms may hire more Lower incomes
Wage workers workers for workers

INFLATION AND UNEMPLOYMENT LINK (IGCSE 0455)

Topic Explanation Result

AD keeps increasing → economy reaches full capacity Inflation increases while

Demand-Pull Inflation → labour becomes scarce → wages rise → costs rise → unemployment falls (short-run
prices rise trade-off)

Cost-Push Inflation
Production costs increase, so firms raise prices Inflation occurs, output may fall
(Definition)

Higher wages, oil prices, raw material costs, indirect

Causes of Cost-Push Costs of production rise
taxes, currency depreciation

Costs increase → cost per unit rises → AS shifts left → Inflation + possible
Process of Cost-Push
output falls → price level rises unemployment (stagflation)

How Unemployment Expansionary policy → AD rises → unemployment

Cost-push inflation
Policies Can Cause Cost- falls → labour shortages → wages rise → production
(overheating)
Push costs rise → AS shifts left

Inflation and Macroeconomic Policies (IGCSE 0455)

 Type of How It May NOT Cause
Policy (Macroeconomic Aim) How It May Cause Inflation
Inflation Inflation

Government spending increases or

Expansionary Fiscal Policy If there is spare capacity, firms
taxes fall → AD rises → economy Demand-pull
(Reduce unemployment / increase output without raising
reaches full capacity → wages rise → inflation
increase growth) prices
prices rise

Expansionary Monetary
Interest rates fall → borrowing and If unemployment is high, firms
Policy (Reduce Demand-pull
spending rise → AD increases → can expand output without
unemployment / increase inflation
excess demand → prices increase cost pressure
growth)

If productivity rises, firms may

Increase in Minimum Wage Labour costs rise → cost per unit Cost-push
absorb higher wages without
(Improve living standards) increases → firms raise prices inflation
raising prices

Higher Indirect Taxes

Production costs increase → firms Cost-push If demand is weak, firms may
(Reduce budget deficit /
pass costs onto consumers inflation not raise prices fully
reduce harmful goods)

Currency Depreciation Imports become more expensive →

Cost-push If firms absorb higher costs or
(Improve exports / reduce production costs rise → firms
inflation demand is low
trade deficit) increase prices

Policies Reducing Labour shortages occur → wages Wage-push If labour supply increases (e.g.,
Unemployment to Very Low increase → production costs rise → (Cost-push) migration, training), wage
Levels AS shifts left inflation pressure may not occur

Supply-Side Policies (Increase Increase AS → more output at

growth, reduce Usually do NOT cause inflation — same price level → reduces
unemployment) inflationary pressure

Current Account Position – Benefits and Drawbacks (IGCSE 0455)

Key IGCSE Evaluation Points

A current account deficit is not always bad if:

• It is caused by importing capital goods that increase future production.

• It is financed by stable foreign direct investment (FDI).

A current account surplus is not always good if:

• It reduces domestic living standards.

• The country depends too much on exports.

A balanced current account suggests stability but does not necessarily mean strong growth.
Current
How It May Process (How the Benefit How It May NOT Process (How Problems
Account
Benefit a Country Happens) Benefit a Country Occur)
Position

High imports allow

Current Access to more Imports exceed exports →
consumers and firms to buy May increase debt;
Account goods and services; money flows out → borrowing
cheaper/better goods → domestic industries
Deficit capital inflows; needed → rising external
improves choice and may decline; currency
(Imports > higher living debt; domestic firms lose
productivity; foreign may depreciate
Exports) standards competitiveness
investors finance deficit

Inflow of foreign Large export earnings →

Current High exports → money May reduce domestic
currency; stronger currency strengthens →
Account flows into country → higher consumption; possible
domestic exports become expensive →
Surplus production → more currency appreciation;
industries; job future exports may fall;
(Exports > employment → economic reliance on foreign
creation in export domestic consumers may face
Imports) growth demand
sectors fewer imports

Balanced Economic stability;

Export earnings match
Current no excessive May indicate low If both exports and imports
import spending → no need
Account borrowing; trade activity or low are low → limited trade →
for external borrowing →
(Exports = sustainable trade economic growth slower economic expansion
stable exchange rate
Imports) position

Exchange Rate Movements (IGCSE 0455)

Key IGCSE Understanding

Appreciation occurs when demand for a country’s currency increases.

Depreciation occurs when demand falls or supply increases.

Exchange rates are determined by demand and supply in the foreign exchange market (in a floating system).

Exchange
Causes (Why It Process (How It Why It May
Rate Benefits Drawbacks
Happens) Happens) NOT Happen
Movement

Demand for
• Increase in
currency
exports • Higher • Exports become more • If demand for
increases • Imports become
interest rates • expensive • Export exports falls • If
(foreigners cheaper • Lower cost
Currency Capital inflows / industries may lose investors lose
buying exports or of raw materials •
Appreciation FDI • Lower competitiveness • May confidence • If
investing) → Reduces imported
(Value rises) inflation than increase inflation rises •
demand exceeds inflation • Higher
other countries • unemployment in If interest rates
supply → purchasing power
Current account export sectors are low
currency value
surplus
rises

• Increase in • Imports become

• Exports become
imports • Lower Demand for more expensive • • If exports rise •
Currency cheaper • Export
interest rates • currency falls or Higher cost of raw If foreign
Depreciation Capital outflows • industries become
supply increases materials • Cost-push investment
(Value falls) Higher inflation more competitive •
→ supply exceeds inflation • Lower increases • If
May reduce current
than other demand → purchasing power interest rates
account deficit • May
countries •
Exchange
Causes (Why It Process (How It Why It May
Rate Benefits Drawbacks
Happens) Happens) NOT Happen
Movement

Current account currency value increase employment rise • If inflation

deficit falls in export sector is controlled

Here is a clear IGCSE 0455 revision table covering inflation, deflation and recession:

Inflation, Deflation and Recession (IGCSE 0455)

Economic How It Occurs Why It Occurs Why It May NOT

Benefits Drawbacks
Problem (Process) (Causes) Occur

Aggregate demand • Increase in AD • Encourages • Reduces

• If there is spare
increases faster (demand-pull) • spending and purchasing power •
capacity • If
than aggregate Higher wages • investment • Hurts savers •
Inflation productivity
supply OR Higher oil/raw Reduces real value Menu and shoe
(General rise increases • If AS
production costs material prices • of debt • May leather costs •
in price level) increases
rise → prices Higher indirect reduce Uncertainty • May
alongside AD • If
increase across the taxes • Currency unemployment worsen current
demand is weak
economy depreciation (short run) account

• Consumers delay • If government

• Fall in consumer • Lower prices for
spending • Profits increases AD • If
Aggregate demand spending • Fall in consumers •
Deflation fall • Firms reduce wages and
falls significantly → investment • High Increased
(General fall output • Higher spending remain
firms reduce prices unemployment • purchasing power •
in price level) unemployment • stable • If central
to sell goods Tight monetary Encourages exports
Real debt burden bank lowers
policy (goods cheaper)
rises interest rates

• If government
Output falls → • High
• Fall in AD • uses
Recession firms cut • Lower inflation • unemployment •
Decrease in expansionary
(Fall in real production → Less pressure on Lower incomes •
investment • policies • If
GDP for two unemployment resources • May Business failures •
Financial crisis • exports increase •
consecutive rises → income falls correct asset Lower tax revenue •
High interest rates • If business
quarters) → further fall in bubbles Government deficit
Global slowdown confidence
demand increases
remains strong

Key IGCSE Exam Understanding

Inflation is usually caused by excess demand or rising costs.

Deflation is caused by weak demand.

Recession is caused by a significant fall in aggregate demand.

Governments use fiscal and monetary policy to prevent severe inflation, deflation or recession.

Macroeconomic Aims of a Country (IGCSE 0455)

Macroeconomic How It Occurs Why It May Interlink with
Causes / Reasons Benefits Drawbacks
Aim / Process NOT Occur Other Aims

• Investment in Supports full

• Higher • May cause
capital • employment
incomes • inflation if • Low
Increase in Technological and poverty
Higher demand grows investment •
Economic total demand improvements • reduction;
standard of faster than Political
Growth and/or supply Education and may conflict
living • More supply • instability • Poor
(Increase in real → higher training → with low
employment Environmental infrastructure •
GDP) output → PPC higher labour inflation or
• Increased degradation • Natural
shifts outward productivity • balance of
government Unequal growth disasters
Increase in factor payments
revenue between sectors
quantity/quality stability

• Higher
• Strong • Risk of • Recession / Supports
Most labour incomes •
economic growth inflation if low growth • economic
Full force employed Better
• Flexible labour demand for Structural growth,
Employment / in productive standards of
markets • labour exceeds mismatch reduces
Low work → low living • Lower
Government job supply • May between skills poverty; may
Unemployment unemployment poverty •
creation increase wage and jobs • High conflict with
rate Increased tax
programs pressures labour costs low inflation
revenue

• Price Supports
• Excess demand
certainty for • Can limit rapid balance of
Prices increase • Balance → demand-pull
consumers economic payments
slowly or between AD and inflation •
and firms • growth if AD is stability; may
Low / Stable remain stable AS • Monetary Rising costs →
Protects restrained • conflict with
Inflation → price and fiscal policy cost-push
purchasing Deflationary full
stability • Supply-side inflation • Weak
power • policies may employment if
maintained efficiency monetary/fiscal
Encourages reduce demand tight policies
controls
investment slow growth

Supports
inflation
• Stable • Protectionist
control and
Exports • Exchange rate currency • policies may • Trade deficits
growth; may
roughly equal management • Encourages reduce or surpluses •
Balance of conflict with
imports → Export foreign consumer choice Sudden capital
Payments full
current promotion • investment • • Strong flows • Global
Stability employment if
account Import control / Avoids currency may economic
currency
balanced tariffs excessive reduce export shocks
adjustment
debt competitiveness
reduces
output

Supported by
• Higher • Weak
Income • Progressive growth and
living • High taxes may government
redistributed taxation • Social employment;
standards • discourage policies •
Low / Reduced → poor benefits • may conflict
Social investment • Economic
Poverty households Education, with low
stability • Dependency on growth
gain → higher health, and job inflation if
Economic welfare concentrated in
HDI creation redistribution
inclusiveness few sectors
increases AD

Balanced • Investment in • Long-term Interlinked

Sustainable / growth, human capital • prosperity • • Requires large • Poor policy with poverty
Equitable improving Infrastructure • Higher HDI • public implementation reduction,
living Policies Social and growth, and
Macroeconomic How It Occurs Why It May Interlink with
Causes / Reasons Benefits Drawbacks
Aim / Process NOT Occur Other Aims

Economic standards, addressing social political expenditure • • Resource employment;

Development reducing inequality stability Slow to achieve constraints may require
inequality trade-offs with
inflation
control

Key Notes:

1. Interlinkages: Most aims support each other (growth ↔ employment ↔ poverty reduction) but can conflict
with others (growth ↔ low inflation, employment ↔ balance of payments).

2. Policy Role: Fiscal, monetary, and supply-side policies are used to achieve these aims. Effectiveness depends
on timing, implementation, and external factors.

3. Evaluation Tip for Exams: Always explain why an aim may not be achieved due to economic shocks, policy
failure, or structural issues..

Quick Summary of Processes:

1. Market Economy: Growth mainly driven by profit incentives; employment follows demand; inflation can be
volatile; poverty may rise without social programs.

2. Command Economy: Growth controlled by government; employment guaranteed; inflation stable; poverty
reduced through redistribution.

3. Mixed Economy: Growth led by private sector, stabilized by government; employment moderate; inflation
controlled; poverty addressed by targeted welfare.

Market Systems and Their Macroeconomic Impacts

Market Process / How It

Benefits Drawbacks Effect on Macroeconomic Aims
System Influences Aims

• Prices act as signals →

resources move to
Economic growth: Usually
• Efficient resource • Can lead to profitable sectors →
increases due to competition and
allocation via supply inequality and output rises → GDP
innovationEmployment: Can
Market and demand• poverty• Public grows• Businesses hire
increase if demand rises, but
Economy Encourages goods may be more if demand increases
cyclical unemployment
(Free innovation and underprovided• → employment rises•
possibleInflation: Can rise in
Market) entrepreneurship• Can cause boom- Excess demand can push
boom periodsPoverty: May
Consumers have bust cycles prices up → inflation may
increase without redistribution
choice (unstable growth) rise• Lack of government
policies
intervention can leave
some groups in poverty

• Government decides
Command • Inefficient Economic growth: May be
• Can focus on social production and prices →
Economy allocation of slower due to
welfare and reduce resources allocated
(Planned resources• Little inefficiencyEmployment: Often
inequality• Can according to plan → GDP
Economy) incentive for high (government job
mobilize resources may grow slowly• Jobs
innovation• provision)Inflation: Can be low if
are guaranteed → low
Market Process / How It
Benefits Drawbacks Effect on Macroeconomic Aims
System Influences Aims

quickly for large Shortages and prices controlledPoverty: Low unemployment• Price
projects surpluses common due to redistribution controls → inflation
remains stable•
Redistribution policies
reduce poverty

• Private sector produces

most goods → drives
Economic growth: Moderate;
• Balances efficiency • Can be complex to growth• Government
private sector drives growth,
with social welfare• manage• intervenes in key areas →
public sector
Encourages Government stabilizes prices, provides
stabilizesEmployment:
Mixed innovation while intervention may public goods, reduces
Moderate; policies reduce
Economy providing public cause inefficiency• poverty• Policies like
cyclical unemploymentInflation:
goods• Government Conflicts between taxation and subsidies
Government can implement
can intervene to private and public adjust AD and AS →
policies to controlPoverty:
stabilize economy sectors influence inflation,
Reduced via social programs
employment, and GDP
growth

Macroeconomic Aims: Effects on Producers, Consumers, and Workers

Negative Negative
Positive Effect on Positive Effect Positive Effect Negative Effect
Macroeconomic Effect on Effect on
Producer / on Consumer / on Worker / on Worker /
Aim Producer / Consumer /
Process Process Process Process
Process Process

More goods
↑ Demand for May face Workload may
and services Prices may More job
goods → higher higher costs increase;
Economic available → rise in boom opportunities →
sales → increased if demand inflation may
Growth better choice, → higher cost higher wages,
revenue → more causes reduce real
possibly lower of living career growth
investment inflation wages
prices initially

More people
employed →
Larger workforce Inflation may
Full Labor higher Jobs available →
→ easier to Demand-pull offset income
Employment / shortages household low job
expand inflation may gains; job
Low may increase income → insecurity,
production → raise prices competition in
Unemployment wage costs higher higher income
higher profits some sectors
spending
power

Low
inflation
Prices may Wage growth
may reduce Stable prices Wages maintain
Stable costs → rise slowly → may be slow →
Low Inflation / profit → purchasing real value →
easier planning, slow access to reduced
Price Stability growth if power steady living
profit predictable some new incentive for
consumer maintained standards
products extra effort
spending
slows
 Negative Negative
Positive Effect on Positive Effect Positive Effect Negative Effect
Macroeconomic Effect on Effect on
Producer / on Consumer / on Worker / on Worker /
Aim Producer / Consumer /
Process Process Process Process
Process Process

Higher taxes
Government Social transfers
Higher taxes may reduce Minimum wages, Increased taxes
spending → → higher
Low Poverty / on profits → disposable welfare → better or regulations
subsidies, income → can
Redistribution reduces net income for standard of may reduce job
incentives → may afford more
earnings some living availability
benefit producers goods
consumers

Stable
Stable exchange May need to currency → Export
Restrictive
rate → easier cut costs to prices of restrictions may
Balance of policies → Stable economy
import/export reduce imported reduce job
Payments less choice, → less risk of
planning → imports → goods stable → opportunities in
Stability higher unemployment
predictable pressure on purchasing export
import costs
costs/revenue profit power industries
maintained

GOVERNMENT POLICIES – FULL EVALUATION TABLE (IGCSE 0455)

MICROECONOMIC POLICIES

How It Works Why It May NOT

Policy Benefits (At least 4) Drawbacks (At least 4)
(Process) Work (Process)

If price too low → 1. Makes essentials

Government sets
Maximum producers leave affordable 2. Protects low- 1. Shortages 2. Black
price below
Price (Price market → black income consumers 3. markets 3. Reduced quality
equilibrium → Qd >
Ceiling) markets develop → Reduces exploitation 4. 4. Less incentive to supply
Qs → shortage
quality falls Improves equity

1. Surplus/waste 2. Higher
1. Protects producer income
Minimum Price set above Government must buy consumer prices 3.
2. Stabilises farm income 3.
Price (Price equilibrium → Qs > surplus → costly → Government storage costs
Encourages production 4.
Floor) Qd → surplus inefficient allocation 4. Misallocation of
Prevents wage exploitation
resources

1. Raises government
1. Higher prices 2.
Raises production revenue 2. Discourages
If demand inelastic → Regressive impact 3. May
cost → supply shifts demerit goods 3.
Indirect Tax consumption barely reduce business profits 4.
left → price rises → Internalises external costs 4.
falls Can cause cost-push
output falls Improves public health (e.g.
inflation
tobacco tax)

1. Lowers prices 2.
Lowers production Firms may become
Encourages merit goods 3. 1. Expensive 2. Opportunity
cost → supply shifts inefficient →
Subsidy Supports domestic cost 3. Risk of inefficiency
right → price falls → government spending
industries 4. Increases 4. Overproduction
output rises increases
output and employment
MACROECONOMIC – DEMAND SIDE

Why It May
Policy How It Works Benefits Drawbacks
NOT Work

↑ Gov spending / ↓ If near full 1. Reduces unemployment 2.

1. Inflation risk 2. Budget
Expansionary taxes → AD rises → capacity → Stimulates growth 3.
deficit 3. Rising national
Fiscal Policy output ↑ → mainly Improves confidence 4.
debt 4. Crowding out
employment ↑ inflation Multiplier effect

May reduce 1. Higher unemployment 2.

↓ Spending / ↑ taxes 1. Controls inflation 2.
Contractionary growth too Lower growth 3. Lower
→ AD falls → inflation Reduces deficit 3. Stabilises
Fiscal Policy much → disposable income 4.
falls economy 4. Reduces imports
recession Political unpopularity

↓ Interest rates → 1. Encourages spending 2.

If low
borrowing ↑ → Boosts investment 3. 1. Demand-pull inflation 2.
Expansionary confidence →
consumption & Reduces unemployment 4. Asset bubbles 3. Savings
Monetary Policy people don’t
investment ↑ → AD Weaker currency boosts fall 4. Income inequality
borrow
rises exports

1. Reduces inflation 2. 1. Slower growth 2. Higher

↑ Interest rates → Doesn’t fix
Contractionary Controls asset bubbles 3. unemployment 3. Lower
borrowing ↓ → AD cost-push
Monetary Policy Encourages saving 4. investment 4. Mortgage
falls inflation
Strengthens currency burden increases

MACROECONOMIC – SUPPLY SIDE

Policy How It Works Why It May NOT Work Benefits Drawbacks

1. Reduces structural
Improves skills → unemployment 2. Increases 1. High cost 2. Long time
Education & Takes long time →
productivity rises growth 3. Improves wages 4. lag 3. Skills mismatch risk
Training expensive
→ AS shifts right Reduces inflationary 4. Benefits uncertain
pressure

Private sector 1. Greater efficiency 2. 1. Job losses 2. Higher

increases May create private Raises government revenue prices 3. Loss of public
Privatisation
efficiency → monopoly 3. Encourages competition control 4. Inequality
productivity ↑ 4. Reduces public spending increases

Reduces business 1. Encourages investment 2. 1. Lower safety standards

May reduce
costs → firms Increases growth 3. 2. Worker exploitation 3.
Deregulation worker/environment
expand → output Improves efficiency 4. Environmental damage 4.
protection
rises Reduces bureaucracy Income inequality

INTERNATIONAL TRADE POLICIES

Why It May NOT

Policy How It Works Benefits Drawbacks
Work

Tax on imports → 1. Higher prices 2. Less

Retaliation from 1. Protects domestic jobs 2.
Tariff import price rises → consumer choice 3. Retaliation
other countries Raises revenue 3. Reduces
domestic demand ↑ risk 4. Inefficiency
 Why It May NOT
Policy How It Works Benefits Drawbacks
Work

trade deficit 4. Supports

infant industries

1. Protects domestic firms 2.

Limit on imports → 1. Higher prices 2. Black
Smuggling; higher Reduces imports 3.
Quota foreign supply markets 3. Less variety 4.
prices Stabilises market 4.
restricted Inefficiency
Safeguards employment

1. Improves current account

Lowers cost → 1. Government cost 2. Trade
Export Expensive; may 2. Boosts growth 3.
exports cheaper → retaliation 3. Overproduction
Subsidy break trade rules Increases employment 4.
demand rises 4. Misallocation
Encourages production

Currency falls → 1. Improves trade balance 2. 1. Imported inflation 2. Higher

If demand
exports cheaper → Boosts growth 3. Increases cost of raw materials 3. Lower
Depreciation inelastic → little
imports expensive employment 4. Reduces real incomes 4. Capital
improvement
→ NX rises deficit outflows

1. Lower inflation 2. Cheaper 1. Trade deficit risk 2. Job

Currency rises →
Harms export imports 3. Higher real losses in export sector 3.
Appreciation imports cheaper →
industries incomes 4. Lower Slower growth 4. Reduced
exports dearer
production costs (imports) competitiveness

Macroeconomic Policies and Economic Objectives (Using Proper Economic Terms)

Economic
Fiscal Policy Monetary Policy Supply-Side Policy
Objective

How it achieves: 1.
Expansionary fiscal policy (↑
government expenditure / ↓
How it achieves: 1. Lower interest
direct taxes) increases How it achieves: 1. Increases
rates reduce cost of borrowing. 2.
aggregate demand (AD). 2. productive capacity of the
↑ Investment (I) and
Higher disposable income economy. 2. Shifts long-run
consumption via cheaper credit.
raises consumption (C). 3. aggregate supply (LRAS) right.
3. Depreciation of exchange rate
Increased public investment 3. Improves labour productivity
improves net exports (X–M). 4. ↑
Economic raises capital formation. 4. (output per worker). 4.
AD leads to higher real output.
Growth Multiplier effect magnifies Encourages entrepreneurship
Why it may not: 1. Low business
(Increase in initial injection. Why it may and innovation. Why it may
confidence reduces
Real GDP) not: 1. If economy near full not: 1. Significant time lag
responsiveness of investment. 2.
employment, leads to demand- before LRAS shifts. 2. High
Liquidity trap (monetary policy
pull inflation not real output fiscal cost. 3. Labour
ineffective). 3. Inflationary
growth. 2. Increased budget immobility limits effectiveness.
pressure if economy at capacity.
deficit and public sector debt. 4. Benefits may be concentrated
4. Banks may restrict credit
3. Crowding-out effect if in specific sectors.
supply.
government borrowing raises
interest rates. 4. Time lags in
implementation and impact.

Low How it achieves: 1. How it achieves: 1. Lower interest How it achieves: 1. Education
Unemployment Expansionary fiscal policy rates stimulate investment. 2. and training reduce structural
increases AD. 2. Higher output Higher output increases labour unemployment. 2. Labour
Economic
Fiscal Policy Monetary Policy Supply-Side Policy
Objective

increases derived demand for demand. 3. Depreciation boosts mobility improves allocation
labour. 3. Public sector export industries. 4. Reduction in efficiency. 3. Reduction in
employment increases. 4. cyclical unemployment. Why it labour market rigidities
Multiplier increases may not: 1. Firms may increase increases flexibility. 4.
employment in related capital intensity instead of hiring. Incentives increase labour force
industries. Why it may not: 1. 2. Weak consumer/business participation rate. Why it may
Does not reduce structural confidence. 3. Time lag in not: 1. Training mismatch with
unemployment. 2. May cause transmission mechanism. 4. market demand. 2. Long
inflation before full Ineffective against structural implementation period. 3. High
employment reached. 3. unemployment. government expenditure
Budget constraints limit required. 4. Limited short-run
spending. 4. Only effective for impact.
cyclical unemployment.

How it achieves: 1. How it achieves: 1. Increased

How it achieves: 1. Higher
Contractionary fiscal policy productivity reduces unit
interest rates reduce borrowing
reduces AD. 2. Lower demand labour costs. 2. Rightward shift
and spending. 2. Reduced AD
reduces demand-pull inflation. of AS reduces cost-push
lowers demand-pull inflation. 3.
3. Reduction in government inflation. 3. Increased
Appreciation of currency reduces
borrowing decreases pressure competition reduces mark-up
Low Inflation import prices. 4. Controls
on interest rates. 4. Reduced pricing. 4. Improves efficiency
(Price Stability) excessive credit growth. Why it
overheating of economy. Why in production. Why it may not:
may not: 1. Ineffective against
it may not: 1. Does not address 1. Slow impact on inflation. 2.
supply shocks. 2. May cause
cost-push inflation. 2. May Limited effect on demand-pull
recession. 3. Exchange rate may
increase cyclical inflation. 3. Expensive reforms.
not appreciate sufficiently. 4.
unemployment. 3. Political 4. Structural reforms may face
Transmission mechanism delays.
constraints. 4. Time lag effects. resistance.

How it achieves: 1.
How it achieves: 1. Higher How it achieves: 1. Improved
Contractionary fiscal policy
interest rates attract capital productivity increases export
reduces AD → lower import
inflows (financial account competitiveness. 2. Lower unit
demand. 2. Reduced
surplus). 2. Currency costs increase non-price
consumption of imported
appreciation may stabilise competitiveness. 3.
Balance of goods. 3. Lower inflation
exchange rate. 3. Lower AD Diversification of export base.
Payments improves export
reduces imports. 4. Depreciation 4. Attracts foreign direct
Stability competitiveness. 4. Reduced
(if rates cut) improves export investment (FDI). Why it may
(Current budget deficit may improve
competitiveness. Why it may not: not: 1. Long time lag. 2. Global
Account) investor confidence. Why it
1. Appreciation worsens trade competition limits export
may not: 1. Exports depend on
balance. 2. Capital flows are growth. 3. High
global demand. 2. Inelastic
volatile. 3. Marshall–Lerner implementation costs. 4. May
demand for imports. 3. May
condition may not hold. 4. Time not reduce import dependency
reduce economic growth. 4.
lag (J-curve effect). quickly.
Exchange rate unchanged.