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THEME 2 COMPLETE NOTES
2
...
1
...

● Three measures of GDP = income, output and expenditure
...
11 trillion
...

However, if GDP is high then there is likely to be high employment, therefore
we could argue that living standards will be higher too
...

● An error/omission/discrepancy in the GDP data is that it does not include the
hidden, shadow or informal economy (e
...
drugs trade, voluntary work)
...

● GDP growth rates need context - countries could have been starting from a
low benchmark, or may be suffering from poor governance or corruption
...
g
...

● GDP may be calculated in different ways globally, making figures unreliable or
hard to compare
...
It also
cannot reflect a population’s happiness levels - e
...
Bhutan has a very low
GDP per capita, but very high national happiness levels (see below)
...

Developing countries may have higher economic growth rates than developed
countries because:
➔ They might not have as many rules constraining firms (e
...
minimum
wage and health and safety)
...

➔ Developing countries have more room for growth and can grow more
quickly because they are starting from a lower base
...


FURTHER limitations of using GDP to compare living standards between
countries and over time
● Difficulty knowing whether to use the official value of the currency (exchange
rates) or the purchasing power of that country
...

● Quality issues - e
...
spending on schools could be high, but few children are
attending
...

● Real values = values have been adjusted to remove the effects of inflation
...

● Also, when looking at economic growth we should look at values rather than
volumes (e
...
Germany = greatest exporter by value, China = greatest
exporter by volume)
...
per capita = per capita is divided by the population
...

● GNI = GDP + income paid into the country by other countries for such things
as interest and dividends
...

● GNI/GNP = the value of everything produced by that country’s factors of
production, no matter where they are located
...

So this is when values are expressed in accordance with the amount that the
currency will buy in the local economy
...
g
...

I want to buy the exact same basket in the USA
...
60
...


Therefore… the £ is undervalued against the $/the $ is overvalued against the
£
...

● Exchange rates will often get closer to the PPP as time passes
...

● PPP can help you to examine the relative living conditions of different
countries
...
1
...

● CPI = an annual survey that is used to determine the contents of a virtual
basket of goods and services that households spend their money on and the
proportion spent on each
...

● To calculate inflation, you have to work out the percentage change in CPI
...

● RPI = an index used to measure inflation that includes housing costs
...

● Rate of inflation = measured by the annual % change in consumer prices
...

● Disinflation = when prices rise more slowly than they have done in the past
...
A family expenditure survey is calculated
...
This finds out what consumers spend their income on
...
A weighted basket of goods is established
...
The price of the basket is calculated
...
The price change of the basket is established
...

● It’s an average - can be skewed
...
This may be good as these can have a
distorting effect upwards as mortgages are very expensive and a high
proportion of people’s incomes
...

● Sampling problems - only 57% of households are surveyed, respondents
could easily lie
...
Prices may also change throughout the year due to
sales and promotions
...
g
...

● When the quality of goods changes, the measure breaks down
...

Issues with deflation
● The real value of debts increases because you can get more for your money
...

● Deflation can lead to a deflationary spiral as consumption decreases, AD
decreases, price level decreases, consumption decreases, etc…
● When deflation occurs consumption decreases because consumers delay
their spending (as they know a good will be cheaper further down the line)
...
Pick a base year (e
...
2005) which always has a value of 100
...
Index number = (raw number / base year raw number) x 100
...
Then calculate percentage change - (change / original) x 100
...
Demand-pull inflation
AD curve shifts outwards leading to an increase
in real GDP and an increase in price level
...
Cost-push inflation

AS curve shifts inwards
leading to a decrease in real
employment/GDP but an
increase in the price level
(negative trade-offs)
...
Growth of money
supply
When there is more money
chasing the same amount of
goods/services
...


Effects are more severe if firms and households haven’t had time to plan for
inflation/deflation and it comes as a surprise!
The effects of inflation - consumers
● The real value of savings falls as prices rise because you can buy less for
your money, so your savings are worth less
...
g
...
Standards of living
decrease
...

● Cash loses value more quickly
...

● Menu costs are the costs firms face of keeping prices updated in shops
...
This could lead to demand rising, causing prices to rise
even further
...

● Increased uncertainty because inflation may be volatile so investment may
fall
...


● Increased prices might be a sign that firms can make more profit so there will
be higher output/GDP
...
This is because workers don’t
assume that their wages will rise with inflation, so firms don’t feel pressured to
increase wages
...

● Inflation reduces the real interest rate, so the cost of borrowing falls as the
value of money falls
...

The effects of inflation - workers
● Inflation might mean that some workers expect high wages, but firms do not
feel confident about paying higher costs - wages are “sticky-down”
...

● According to some economists there is a trade-off between wage inflation and
unemployment (cost-push inflation diagram)
...

● If it exceeds/goes below the target, the governor of the Bank of England must
write a letter to the Chancellor explaining how they will get it under control
again
...


2
...
3 Employment and unemployment
Definitions
● Level of employment = number of people in work
...

● Workforce = people of working age who are willing and able to work
...
Examples of people who are economically inactive could be
students or stay-at-home parents
...

The problem with this measure is that it can make the levels of unemployment
look lower than they really are (e
...
university students looking for jobs)
...

● Underemployment = you’re employed but would like to work more hours (this
increased a lot after the 2008 financial crisis)
...
This is
the lowest figure
...
Issues:
➔ Not everyone claims benefits because of the stigma/because they may not
need them
...
g
...

➔ You have to prove you’re looking for work at the Jobcentre every 2 weeks some people might not claim because of the hassle, whilst others who are
means-tested may have their JSA taken away
...

Alternative claimant count = the amount of people who claim
unemployment-related benefits (not just JSA)
...
It is a legal requirement in the EU and records people as “unemployed”
as those out of work in the last 4 weeks, who are ready to start working again in the
next 2 weeks
...
Issues:
➔ It only measures a proportion of the population
...

➔ Survey data is 6 weeks out of date by the time it is published
...
the LFS includes 16 year olds so it is more inclusive
...

Target

● “Full employment”
...
Therefore the
only effect is inflation
...

● Number of school leavers entering higher/further education
...

➔ Immigration can cause employment AND unemployment to rise at the
same time, as the size of the workforce increases, but migrants may
struggle to get jobs if they have poor English/limited qualifications
...

● Level of taxes and benefits - if income taxes or out-of-work benefits are high,
then there is a disincentive for people to work
...
Occurs when a minimum wage is set above the equilibrium
wage rate
...


● Demand-deficient unemployment (Keynesian/cyclical unemployment) =
this is involuntary unemployment due to a lack of demand for goods and
services (e
...
“labour-shedding” when firms are affected by
recession/slowdown phase)
...
This suggests that people can be
unemployed, even in the long run
...

➔ An increase in the value of a currency
...

➔ External shocks such as oil price rises
...

Frictional unemployment = people who are between jobs (e
...
after
resigning from a previous job or moving to be closer to family, it takes time to
find a new job)
...

Structural unemployment = when people lose jobs in a declining industry
and do not have the skills to join other industries
...

Seasonal unemployment = people who have jobs only at certain times of
year (e
...
fruit pickers or surfing instructors)
...
g
...

Technological unemployment = innovations and advancements in
technology, which increase productivity, can displace workers
...
Workers with limited or out-dated skills
may not be able to find future employment, potentially leading to long-term
unemployment
...

● If immigrants cannot find work or displace other people from work, then
unemployment might increase
...
g
...
Unemployed people who are highly skilled and flexible
won’t be unemployed for long
...

The effects of unemployment
● The effects of unemployment are predominantly negative on society
...
People who are unemployed may lose morale and their
skills, creating repercussions for family members (e
...
mental health issues)

and hysteresis effects (making workers less employable in the long run)
...

● For firms: people spend less so firms will have to lower prices and make less
profit
...

● For the government: as unemployment rises, the government has to pay out
more in out-of-work benefits and will receive less tax revenue
...
It has been
argued that high levels of unemployment create crime, social unrest and other
problems such as alcoholism
...

Intervention
● Benefit and tax reforms
...

● Changing the participation age of the labour force
...
g
...

● Improving the geographical mobility of labour (e
...
by building new affordable
houses or improving infrastructure)
...
1
...
It has 3 main parts - the current, financial and capital
accounts - with the current account being the most significant element
...

● Trade in goods = the movement of tangible products across international
borders (e
...
the UK is a large exporter of medicines and cars but a major
importer of food and oil)
...
g
...

● Investment income = a measure of interest, profit and dividends that are
rewards for capital investments in another country
...
g
...

● Current account surplus = where inflows on the current account of the
balance of payments are greater than outflows (e
...
more money comes into

a country for purchase of their exports than flows out to pay for imports)
...

● Current account deficit = where outflows on the current account of the
balance of payments are greater than inflows (e
...
less money comes into a
country for purchase of their exports than flows out to pay for imports)
...

The financial account and capital account
● Financial account = a record of money flows for investment purposes (e
...

FDI and foreign portfolio investment, or ‘hot money’, which is the speculative
movement of money between countries as exchange rates and interest rates
change)
...

Current account imbalances and intervention
● On its own, a balance of payments deficit on the current account is not a
problem, as long as the country can fund it - it’s a sign that living standards
are rising
...
This might mean that the currency falls in value,
which is inflationary as imports become more expensive
...

● Higher taxes and cuts in government spending might solve the deficit, but this
would create a trade-off with economic growth
...
g
...

● International trade means that countries become interdependent as they rely
on each other for income and for goods and services
...
This is a current account imbalance
...

● In the UK, the most significant factor is the loss of competitiveness in the
manufacturing sector due to globalisation
...

● When a surplus or deficit becomes unsustainable, issues arise
...
This may
lead to higher unemployment, but could also prevent the onset of inflation
...
2 Aggregate demand (AD)
2
...
1 The characteristics of AD
Aggregate demand = the total planned expenditure (spending) on goods and
services produced in the UK
...

● Consumption = 63% of AD, Investment = 16% of AD, Government spending =
19% of AD
...

● The area underneath the AD curve is the same for any price level and real
GDP
...

AD curve

2
...
2 Consumption (60% of AD)
Influences on consumption include:
● Real disposable income (e
...
if income tax is cut or there is an increase in
tax free allowances this leads to higher disposable income and AD shifts)
...

● Interest rates (lower rates = more spending because the cost of borrowing is
less)
...


● Availability of credit
...
g
...
Animal spirits*
...
However this is an assumption)
...
2
...
g
...

Influences on investment include:
● Interest rates (cost of borrowing for firms and individuals)
...
This links in with Keynes’ animal spirits*)
...

● Spare capacity (small capacity = increased investment)
...

● Price of capital
...

● The rate of economic growth
...

● Access to credit
...
These herd instincts make markets move in large
booms and busts, as people buy and sell impulsively rather than using purely
rational behaviour
...

2
...
4 Government expenditure (25% of AD)
● Current spending = government spending for the maintenance of public
services
...

● Welfare spending = government spending on benefits and pensions
...

● Budget deficit = spending is greater than tax in a fiscal year
...

● National debt = the total amount of debt over time (accumulation of budget
deficits)
...
g
...

Therefore, the government may have a budget/fiscal surplus during a boom)
...

● Fiscal policy (e
...
rise in taxes, decrease in spending, etc
...

● Contractionary fiscal policy shifts the AD curve inwards by decreasing C, I
or G
...
This can:
➔ Increase consumption by increasing disposable income (because of tax cuts)
...

➔ Increase government purchases because government spending itself rises
(e
...
new hospitals and schools)
...

● If net spending is increased in a recession, this reverses the effects of
demand deficiency (and the ensuing unemployment)
...

2
...
5 Net exports/trade (X-M)
● Net trade = exports - imports
...

● Imports = a withdrawal from the circular flow of income, as the goods and
services bought from abroad takes money out of the domestic flow of income
...

Influences on net trade include:
● Exports increase or imports decrease (outwards shift in AD - or vice versa)
...

● Decrease in real income at home (decreased imports)
...

(HOWEVER
...
g
...

● Degree of protectionism (trade barriers and tariffs - fewer barriers leads to
more exports)
...
g
...


Alternatively, a collapse in a foreign stock market may have direct effects on
UK exports via wealth effects)
...

● Non-price factors (quality, after-sales care, customer service, etc
...
g
...

UK Trade
● Top 3 exports = financial services, cars and wholesale medicines
...

● Top 3 imports = cars, vehicle parts and aircraft
...

● Imports to the UK are usually normal goods, so as real incomes rise in the
UK, there will be an increase in demand for imports which will worsen the
UK’s net trade balance
...


2
...
3
...

● Short-run AS = 1 of the 4 factors of production is fixed, so this leads to a
change in the costs of production
...

● So in the short-run you cannot be any more productive (productive capacity
remains unchanged due to the fixed factor/s) whereas in the long-run there
can be an increase in productive capacity
...
But if
there’s a change in the costs of production, then the AS curve will shift
...

● The Keynesian LRAS curve is vertical because it shows that there can be
spare capacity or an output gap, even in the long run
...

However, some factors, such as a fall in oil prices, can have a short-run and
long-run effect
...
3
...

● Changes in exchange rates (e
...
becoming more favourable for the suppliers)
...

● Changes in barriers to trade (e
...
fewer tariffs)
...
g
...

2
...
3 Long-run AS
Factors that influence long-run AS
● Technology*
...
g
...

● Number of firms (competition policy)
...

● Subsidies
...


●
●
●
●

Better supply chains
...

Demographic changes or migration
...


Labour market
Product market

*if it’s to do with replacing workers with technology
...


● Classical economists believe that in the long run an economy will operate at
full capacity, so there will be no unemployed resources
...

However, the shape is different because Keynes believed that the equilibrium
level of output CAN occur below the full employment level of output
...

Keynesian LRAS
The flat part of the graph (A) is elastic,
the curve upwards (B) is called the
bottleneck and the vertical part (C) is
called the inelastic part
...
Price
level (PL) remains unchanged
...

B - starting to get some labour
shortages
...

C - full employment has been reached
...
This provides financial incentives
...

HOWEVER this model is flawed because it only looks at wages as an incentive to
work
...
4 National income
2
...
1 National income

● Wealth = the sum of all the assets in the economy (e
...
houses and shares)
...
However, changes in wealth have an effect on
incomes and spending
...

● Income = a flow concept
...

2
...
2 Injections and withdrawals
● Injections = flows into the circular flow of income comprising I, G and X
...

● Withdrawals = flows out of the circular flow of income which comprise
savings, tax and imports
...

● These 3 withdrawals effectively determine the size of the multiplier
...

● If injections are greater than leakages, the economy will grow
...

2
...
3 Equilibrium levels of real national output
● Where AD and AS meet, there is an equilibrium point which tells us the price
level and real GDP of a country
...

● If prices were higher than the new equilibrium (where new AD and new AS
cross) then prices would fall because there would be excess supply
...

2
...
4 The multiplier
● The multiplier is ONLY to do with AD (C + I + G + (X-M))
...

● The multiplier = a factor that shows the change in total income as compared
to the initial injection
...

● The multiplier = 1/MPW
...

● MPW = MPS + MPT + MPM
...

● Marginal propensity to save (MPS) = how much of any extra pound earned
by you is saved
...

● Marginal propensity to import (MPM) = how much of any extra pound
earned by you is spent outside the economy on imports
...
4
...

● On a graph, a positive multiplier is an outward shift of the AD curve, whilst a
negative multiplier is demonstrated by an inwards shift of the AD curve
...
Injections can be targeted at those with the
biggest MPC in order to increase the size of the multiplier
...
Governments use changes in spending to influence macroeconomic

performance, but it is impossible for the government to know the exact effect
of their spending as it is difficult to know the size of the multiplier
...

● The overall effect on the economy will depend on the change in AD and the
elasticity of the AS curve
...
5 Economic growth
Definition
● Actual economic growth = an increase in real incomes or GDP
...
g
...

● The output gap = the difference between actual and potential growth
...

● E
...
Consumption may increase because of increased consumer confidence
or the availability of credit
...

● Alternatively, export-led growth (the economic growth caused by rises in net
exports) stimulates the domestic economy and improves the trade balance
...
This may
happen due to a fall in costs of production or because of government
supply-side policies
...
if AD shifts out onto the inelastic part of the AS curve, there will
not be economic growth, only increased prices
...

● Potential economic growth can only occur when the vertical part of the AS
curve shifts to the right, OR when the PPF shifts out
...

● The main problem with export-led growth is that it makes the exporters
vulnerable to changes in demand in other countries or changes in exchange
rates
...

● Government instability (lack of FDI, potential fiscal deficit so cannot spend
money to encourage growth)
...

● External constraints (uneven access to world trade, global recession,
terrorism fears)
...
It might signify that the economy
is overheating and could lead to a rise in interest rates
...

● If the economy is growing below trend and there’s spare capacity in an
economy, then this is a negative output gap
...
g
...

Using graphs to show output gaps
● Keynesians believe that a negative output gap can exist in the long run and
the short run
...


The trade/business cycle
● This demonstrates recurring trends in economic growth rates
...

● This trend is explained, in part, by Keynes’ animal spirits
...
g
...
During a
slowdown, the level of GDP may be rising, but rising below the trend, or GDP
might be falling
...

Lower/negative GDP growth/output
...

Lower inflation
...

Characteristics of a boom include:
Low unemployment (maybe a positive output gap)
...

Demand-pull inflationary pressures
...


The impacts of economic growth
Benefits of economic growth
● Consumers:
➔ Higher real wages
...

➔ People can afford to save more money
...

● Firms:
➔ Increased profits because consumption has increased
...

➔ Better business expectations and confidence for the future
...

● Governments:
➔ Less unemployment means that the government pays out less in
benefits
...

➔ Smaller budget deficit - spending less
...

➔ As employment rates increase, poverty rates decrease
...


➔ Firms may be incentivised to use cleaner technology, having external
benefits
...

➔ Increased wealth - assets, e
...
shares and houses
...

Costs of economic growth
● Income inequality:
➔ The gap between rich and poor is likely to get bigger because unskilled
and unwaged workers are less likely to benefit from economic growth
...

➔ People who have inflexible skills may find themselves in short-term
unemployment
...

➔ Low-income families may get pushed out of thriving urban areas isolation, lost sense of community, poorer environmental quality
...

● Environmental problems:
➔ As people get richer, they tend to buy more cars and polluting goods
...

➔ HOWEVER… governments are likely to introduce carbon-cutting
measures like taxes
...

● Rapid growth:
➔ Short-term spikes in prices
...

● Bottlenecks:
➔ If an economy has little spare capacity, then the only thing that can
happen is that the price of the factors of production (e
...
skilled labour)
will increase
...


Target
● Strong, sustained and sustainable economic growth
...
6 Macroeconomic objectives and policies
2
...
1 Possible macroeconomic objectives
● TIGER(S) - Trade, Inflation, Growth, Employment and Redistribution of
income (Stability)
...

● Aim for inflation = low and stable (2% + or - 1%)
...
4%
...
They will use monetary policy instruments to do so
...

● Aim for employment = low unemployment (full employment)
...
The best measure is perhaps GDP per capita
...

2
...
2 Demand-side policies
● Demand-side policies = deliberate manipulations by the government of AD
in order to achieve macroeconomic objectives
...

● Monetary policy = decision making using monetary instruments, such as
interest rates (e
...
base rate) and quantitative easing
...
The Monetary Policy Committee
(MPC) makes the decisions
...

● When the Bank of England sets their base rate, other banks must follow
...

● When interest rates go up, exchange rates go up
...
This acts like an investment in the private sector, or an
injection into the circular flow of income (which has a multiplier effect)
...

● The MPC began purchasing financial assets (long-term loans called gilts)
funded by the creation of central bank reserves which are paid for by selling

●

●

●
●
●

Treasury bills (short-term 90 day loans) which are basically cash because it's
really easy to turn them into cash
...

Assets are of higher value and have more liquidity
...
Lower
interest rates also lower the cost of borrowing so people are more likely to
take out loans
...

A second round of asset purchases, known as QE2, began in 2011
...
This will tighten
monetary policy
...
When the government manages its
spending and taxation with the aim of changing the total level of spending in
the economy
...

● Budget deficit = spending is greater than tax in a fiscal year
...

● National debt = the total amount of debt over time (accumulation of budget
deficits)
...
If an economy is going through a slowdown/recession,
Keynesian economists believe that the government should spend
...
This
will put the government’s accounts in a better position
...
g
...
g
...

● Disposable income (income after tax) is affected by direct taxation (if direct
taxes are raised, AD will decrease)
...

● Indirect taxes influence AS because it impacts how much a firm is willing and
able to sell at a certain price
...

● The Bank’s monetary policy objective is to deliver price stability and to support
the Government’s economic objectives including those for growth and
employment
...
Stable prices are defined by the Government's inflation target, which
the Bank seeks to meet through the decisions delegated to the Monetary
Policy Committee, explaining those decisions transparently and implementing
them effectively in the money markets
...
The Report
sets out the detailed economic analysis and inflation projections on which the
Bank's Monetary Policy Committee bases its interest rate decisions, and
presents an assessment of the prospects for UK inflation
...

● In its first 10 years of operation, the Governor of the Bank of England only had
to write one letter to the Chancellor, explaining why inflation was too high
...

Demand-side policies during the Great Depression and the Global Financial
Crisis of 2008
● 1929 - Wall Street Crash
...
This was a demand shock
...
The US responded rapidly to prevent a rapid
downwards spiral and restore confidence
...
Therefore, Milton Friedman and other
classical economists said that Keynes’ LRAS curve just leads to inflation and
only has short term effects on the job market, so the government should not
use demand-side policies at all
...
Friedman’s
ideas remained popular until 2008
...
Until 2010, policy responses to the crash in the UK
and US were similar
...
g
...
This led to LOTS of spending (in
fact, public spending as a % of GDP doubled from 40% to 80% in the UK)
...
They
had to cut back public spending due to the budget deficit
...
US growth soared and the
UK didn’t experience the predicted double-dip recession and although growth
was slow, by 2014 it was up to the levels seen in the UK
...
However monetary policy
has a shorter time lag than fiscal policy
...

● Rises in interest rates usually worsen income distribution
...

● Biggest criticism of monetary policy is that it raises the costs of production
when the cause of inflation itself may be rising costs, exacerbating the
problem
...

● The budget is only done once a year - what if a major economic event
happens after it?
● When the government increases spending, workers will increase their pay
demands, leading to increased wages and costs rather than expanding
output
...
However, it could be argued that expansionary
fiscal policy just causes inflation because the debt issued to finance the
expansion is so liquid that it acts like printing money
...

● Expansionary fiscal policy = outwards shift in AD
...

● Direct taxes = increase shifts AD in, decrease shifts AD out
...

● Lower interest rates = AD shifts out
...
6
...

● Market-based methods increase the effectiveness of markets by allowing
more flexibility of demand and supply
...

● Market-based interventions include:

➔ Increasing competition - leads to a decrease in costs and an
increase in innovation
...
Deregulation is another option to
cut costs
...
g
...
Subsidies have a similar effect
...
g
...
Firms’ costs of
production would decrease and the AS curve would shift outwards
...

● These include:
➔ Improving education and training
...

➔ Introducing performance-related pay (longer term strategy to increase
productivity)
...
g
...

➔ Improving infrastructure (e
...
technology, HS2, new runway at
Heathrow)
...
g
...

● Expensive for the government - there is an opportunity cost
...

● By implementing regulation, there will be less incentive for producers so they
may outsource production
...
g
...

● Time lag between training/education and working
...

● Reducing tax leads to less income for the government
...
This is due to demand-deficient
unemployment
...
Cutting minimum wages and
decreasing trade union power impacts low income workers adversely and
disproportionately
...
g
...

● However, effective supply-side policies can lead to lower inflation and higher
rates of economic growth
...

2
...
4 Conflicts and trade-offs between objectives and policies
Between the macroeconomic objectives
● There’s a trade-off between economic growth and the current account
because as incomes rise, consumers will demand more imports and worsen
the trade balance
...

● There’s also a trade-off between inflation and equilibrium on the balance
of payments
...
But if there’s a surplus then the equilibrium cannot be restored by
controlling inflation
...
This would worsen the trade position in the long run
...
g
...
This would widen income
inequality
...
In addition, even if wages rise by
the same percentage for everyone, income inequality still increases in
absolute terms
...

● There’s a trade-off between inflation and unemployment as a shortage of
labour in a specific field can cause wage pressures to build up
...
Therefore, low unemployment (or reduced spare capacity) leads to
higher inflation
...
This means that the long-run Phillips curve is vertical
...
This is because there is likely to be more
congestion and more energy use by offices
...

● However, the government benefits from more tax revenue which could be
invested in cleaning up the environment
...
In addition, taxes such as the
congestion charge can offset emissions
...
g
...
The
supply-side effects may cancel out the rise in the price level from the
expansion in demand
...

Fiscal policy and monetary policy

● If the government runs a budget deficit this has to be financed, which will
affect the money markets
...
This means that the MPC may favour a tighter
monetary policy
...

Monetary policy and supply-side policy
● A tighter monetary policy can lead to interest rates being higher than they
need to be, increasing costs of production for firms (e
...
through loans)
...

● Tight monetary policy can improve the supply-side, although higher exchange
rates are not guaranteed and they harm exporting firms
...




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