2.3.4 Possible conflicts between macroeconomic policy objectives

Question 1

when do policy conflicts exist?

Answer 1

when attempts to solve one econ problem leads away from solving another, can be made worse by mulitpler

Question 2

conflicts arise between:

Answer 2

• lower or higher AD
• minimising unemployment + keeping inflatio stable
• higher econ growth + achieving BoP
• eliminating budget deficit

Question 3

policy objectives needing higher AD

Answer 3

• SR econ growth
• reducing cyclical unemployment
• eliminating budget deficit

Question 4

policy objectives needing lower AD

Answer 4

• reducing demand-pull inflation
• imrpoving current account balence
• eliminating budget deficit

Question 5

Policy conflicts in LR

Answer 5

• many argue they dont occour in LR
• some argue higher growth can be achieved by govs not worrying about equible distribution of income
• supply side may be solution

Question 6

conflicts and positive output gaps

Answer 6

= actual growth above trend - cant be maintained in LR
* solution = reduce AD
* will eventually lead to prices increasing
* in oder to keep output at higher levels, firms will find costs increasing.

Question 7

conflicts and negative output gaps

Answer 7

• if exists, cyclical employment likely to increase
• fewer resoucres required for production as econ growth below its productive capacity
• to solve = Increase AD
• unem can rise even if growth is positive
• creates conflicts as requires contradictionary solutions.

Question 8

SR Phillips curve shows?

Answer 8

shows when unemployment falls, inflation will rise and vise versa.

Question 9

why do trade off still exist in SR Phillips curve

Answer 9

because as unem falls to low levels, trade unions and wokers feel more confident in claiming higher wages

Question 10

SR Phillips curve what do higher wages mean

Answer 10

= increase costs of production, leading to higher inflation as firms raise selling prices to cover high wage costs.

Question 11

SR Phillips curve, what do trade offs allow?

Answer 11

allow govs to position econ wheres its wated in terms of employment + inflation.
rising together shouldn’t have been possibl on OG curve

Question 12

LR Phillips curve

Answer 12

vertical and remains at level where labour market is in equilibrum + no upward pressure on inflation
* SR = workers experience money illusion
* workers have adaptive expectations w/ inflation