As businesses produce more output there are likely to be more energy generation required, which can cause pollution.

The extra wealth and income that comes with economic growth means that increasing numbers of people buy cars and other vehicles. This results in more emissions, with congestion making this worse.

As more land is taken for business development, less is available for wildlife. Th Earth’s rainforests, plains, lakes and other habitats continue to disappear as they are cleared to make way for agriculture, housing, roads, pipelines and other industrial uses.

- LDC are generally poor, and so economic growth is badly needed to reduce poverty, have longer life expectancy, lower infant mortality and higher living standards. - LDC have generally been able to accept damage to the environment as a price to pay for economic growth. India and China are good examples.

- However, China and India are also good examples of attitudes which are changing. These developing economies are beginning to realise how costly environmental damage is and are developing policies to reduce the detrimental effects.

- MDC are already relatively rich and by comparison they can afford to place a bigger priority on protecting the environment (see chapter 29). Some of these policies have, - however, restricting business development and economic growth.

Higher IR could strengthens a country’s exchange rate as foreign investors would benefit from moving their money into the bank accounts of the domestic country.

This process would require foreigners to sell their own currency and buy the currency of the country which had just raised their interest rates.

This would strengthen the currency, making X more expensive and M cheaper, worsening CA balance if the value of exports falls and the value of imports rises.

Of course whether or not this actually happens would depend on the elasticities of the exports and imports! (ev - PED)

Fiscal policy could be used to reduce inflation. For example, if the government reduces spending (less G) and/or increases taxes (less C), less AD, reducing DP inflation.

At the same time, there shouldn’t be a direct effect on the exchange rate (unlike the change of interest rates mentioned previously). In this way, the prices of X&M will be fairly stable and the current account relatively unaffected.

However, llower G and higher taxes can reduce disposable incomes of consumers, causing less C on imports. This could actually improve the current account.

Supply side policies are not likely to affect the exchange rate and are also “business friendly”. As a result, businesses might be able to produce more output at lower prices. This would help increase X and therefore improve the current account balance.

a. Expansionary fiscal policy

b. Expansionary monetary policy

If firms are close to 100% capacity, and cannot easily acquire more resources (e.g. skilled labour) in order to increase production, then CP inflation is more likely to result.

--> Because when resources are not easy to access, the cost to purchase them is higher. Firms would then pass on those higher costs to consumers, meaning more CP inflation.

As mentioned previously, the use of supply side policies may help to increase economic growth whilst not increasing inflation.

1. Higher IRs = less C&I, less AD and workers will lose their jobs as businesses will not need to supply as many goods and services.

2. Higher IRs = higher mortgage payments for many households, less spending power, less AD. Firms will react by laying off staff if less goods and services need to be produced.

3. Higher interest charges for firms, higher costs and less profits, less incentive to invest in capital goods, less I. A lower demand for capital goods will require less staff by those firms which make capital goods.

4. Higher IRs less incentive for business to borrow to invest in new technology and expansion. This could make them less competitive in foreign markets, which could reduce the demand for their products, reducing to need for as many staff.

5. Higher IRs may result in higher exchange rates, again meaning that businesses that export goods abroad may face a reduction in demand as their products are now relatively more expensive. This could reduce the need for as many staff.

1. C may fall due to higher taxes, less AD, firms require less staff, higher unemployment

2. Lower gov spending - less infrastructure, less G, directly reduce jobs in the public sector, gov may not require that many resouces to conduct the project, higher unemloyment.

3. Lower Gov spending 2 - less welfare benefits, unemployed people consumer lesser, less C, less AD, lower level of production, less incentive to employ resources, higher unemployment.

This is because they are designed to increase output, not reduce AD.

As AS increases, output rises and overall price levels, i.e. inflation, also reduces.

AS normally reduces inflation because businesses are getting more efficient, i.e. their average production costs are falling (see chapter 33 for SS policies which make the economy more efficient). eg. EOS

Example SS policies could include privatisation and deregulation.

However, supply side measures will not definitely reduce inflation, as they may actually cause higher AD (e.g. infrastructure spending).

long term effect: They could also be expensive, and may take a long time to have an impact on the economy.