11.4 Conflicts Between Macroeconomic Policy Objectives

Question 1

What are the 4 short-run conflicts with policy objectives?

Answer 1

-Higher living standards now and in the future

-increasing rate of economic growth and achieving a more equal distribution of income and wealth

-achieving low unemployment and controlling inflation

-internal policy objectives of full employment and growth and the external objective of a satisfactory balance of payments

Question 2

With the 3rd trade off govs have tried taxing rich and giving tax revenues to poor in welfare benefits? Why do free market Economists not like this

Answer 2

Reduces enrapenriural and personal incentives in labour market, makes the economy less competitive and a slower growth rate, inequalities needed for economic growth

Question 3

Trade off: current living standards v future living standards?

Answer 3

Short term: boost consumption

However sacrificed saving and investment which affects long run growth

Question 4

What happens when policies are mutually exclusive?

Answer 4

Govs trade off between policy objectives

Question 5

What do free market economists think facilities the production of high-quality goods and services that people wish to buy?

Answer 5

Supply side policies combined with supply side reform

Question 6

Diagram for output gaps and volatile and smooth economic cycles

Answer 6

Question 7

What does it mean when an economy is experiencing a volatile economic cycle?

Answer 7

The positive and negative output gaps are relatively large

Question 8

What does it mean when there is a stable economic cycle?

Answer 8

The output gaps negative and positive are smaller

Question 9

What can be assumed with a positive output gap?

Answer 9

Inflation increases unemployment decreasing

(Opposite for negative output gap)

Question 10

Phillips curve def

Answer 10

Based on evidence for economy ,show’s relationship between rate or inflation and rate of unemployment

(Known as the short-run-Philips curve)

Question 11

What is the point of the Philips curve?

Answer 11

See if inflation is caused by demand pull or cost push inflation

Question 12

Diagram for the Philips curve

Answer 12

Question 13

What did Philips argue?

Answer 13

Statical evidence shows an inverse relationship existed between change of wages (rate of wage inflation) and unemployment

Question 14

Explain the Philips curve: demand pull inflation

Answer 14

The factor causing unemployment to fall moving up the curve is excess demand, which pulls up money wages and average price level

Question 15

Explain the Philips curve: cost push inflation?

Answer 15

Falling employment increase trade union power enabling more monopoly over supply of labour to push up wages

Question 16

Describe the Philips curve

Answer 16

U1 initial unemployment and rate of inflation p1

By increasing AD gov can move the economy to point B higher rate of inflation and lower unemployment

(Must accept an acceptable combination of inflation and unemployment)

Question 17

Diagram for long run Philips curve and real rate of unemployment

Answer 17

Question 18

Describe this graph

Answer 18

Intersection when inflation is 0 rate of unemployment is natural rate of unemployment

Question 19

What do free market economists argue about the natural level of unemployment?

Answer 19

Impossible to reduce unemployment less than this point without suffering unanticipated rate of unemployment

Question 20

Diagram for supply side policies shifting LRPC to the left

Answer 20

Question 21

Why is increasing Ad an issue

Answer 21

Reduces unemployment below the natural rate leads to higher expected inflation and therefore higher future inflation

Question 22

Describe what’s going on here

Answer 22

Supply aide policies cause the shifts

Reduces the natural rate of unemployment without inflationary issues

Question 23

What is the issue with the SRPC

Answer 23

Only takes into account current rates of inflation not future rates

Question 24

Diagram for LRPC and SRPC (multiple)

Answer 24

Question 25

What assumptions are made on this graph

Answer 25

Rate of growth and labour productivity =0
Price inflation =wage inflation
Future expectations of inflation based only on current rates of inflation

Question 26

Describe this graph(hard)

Answer 26

At A current and future inflation =0

Gov increases AD to point B, inflation rises to point p1 but this is unsustainable due to workers to supply more labour wages must increase but this would lead to less demand from firms

Workers and employers must suffer money illusion to keep future expectations of inflation below the current rate

SRPC shifts outwards because workers begin to adjust expectations to inflation as it rises (inward rates when it falls vice versa)

Question 27

What is the money illusion

Answer 27

When people mistake real values for nominal values

Question 28

What will attempts to alter the natural level of unemployment lead to?

Answer 28

Short run: accelerating inflation
Long run:increases in the natural level of unemployment in the future lead point B to shift to point C as gov is aware of this

Question 29

What is the difference between the LRPC and SRPC?

Answer 29

Trade offs can’t occur on long run

Question 30

What is the correct way to reduce unemployment?

Answer 30

Use supply side policies rather than demand management to shift LRPC leftwards(decrease inflation itself)

Question 31

What does the theory of rational expectations reject?

Answer 31

Govs can trade off along a SRPC and reduce unemployment below the natural rate

Question 32

In the short run when might the policy conflicts of reducing unemployment and maintaining price stability occur?

Answer 32

I’m a highly depressed economy which output is well below its usual capacity

Question 33

When is short run reconciliation no longer possible?

Answer 33

If the economy is producing on the LRAS-gov should try and increase labour productivity and making the economy more competitive in world markets