Cambridge International as and a level Economics Ebook

Tinbergen’s rule
. For example, a government may cut 
income tax in order to reduce unemployment, while 
it may devalue the currency in a bid to improve the 
current account position. In practice governments 
use a combination of fiscal, monetary and supply side 
policy measures. For example, in 2013 the Brazilian 
government used a variety of measures in a bid to 
reduce inf lation. These included raising the rate 
of interest and subsidising electricity and public 
transport.
TOP TIP
In assessing the eff ectiveness of a particular policy 
measure in solving a particular economic problem, for 
example a high inflation rate, it is useful to consider the 
possible adverse eff ects it may have on other policy 
objectives.
Government failure in 
macroeconomic policy
Th
ere are a number of reasons for 
government 
macroeconomic failure
– when government 
macroeconomic policy measures may actually cause a 
deterioration rather than an improvement in economic 
performance. For instance, if a government understates 
the size of the national income multiplier, it may increase 
its spending by too much. Th
is may result in swapping one 
problem, a negative output gap, with another problem, a 
positive output gap.
Government macroeconomic failure: 
government 
intervention reducing rather than increasing economic 
performance.
KEY TERM
In the case of a number of policy measures there may be 
a series of time lags. For example, there may be a delay 
before a government recognises that infl ationary pressure 
is building up – a recognition lag. Th
ere may then be an 
implementation lag – the time it takes to draw up and 
introduce a policy measure such as a rise in income tax. 
Th
ere is then the time it takes for the policy measure 
to infl uence the behaviour of households and fi rms – a 
behavioural lag.
By the time a policy measure does have an impact 
on economic behaviour, the level of economic activity 
may have changed, which may make the policy measure 
inappropriate. Indeed, governments may seek to use fi scal 
and monetary policy measures to off set the eff ects of the