2.6 Macroeconomi Objectives And Policies Flashcards
How are trade offs encountered by the government when making decisions in the short run ?
In the short run, governments decide which objectives they think are most important and accept that these decisions may have an adverse effect on their other objectives — i.e. they make trade-offs between their objectives.
What is the purpose of the Philips curve ?
Shows the idea that there is a trade off ( inverse and non linear relationship ) between unemployment and inflation.
What theory is the short run Philips curve based upon ?
That there is an inverse relationship between wages growth and unemployment.
When did the Philips curve come about ?
1960s
Why is that as unemployment decreases inflation occurs ?
As the economy comes towards full capacity, and AD keeps shifting outwards, the price level increases due to pressures on supply.
What is the trade off / conflict between inflation and unemployment ?
To have low unemployment would mean inflation objectives are not fulfilled ( low and stable ). And vice versa, whilst keeping inflation low, employment objectives will have to be abandoned.
What was an argument against the Phillips curve ?
Stagflation - the Phillips curve did not explain why an economy could experience both high inflation and high unemployment ( couldn’t be shown on the graph ).
How did monetarists ( classical economists ) adapt the Philips curve to show stagflation ?
When supply shocks occur ( both positive and negative), the short run Philips curve shifts in the opposite direction to the SRAS shift on a classical LRAS diagram.
Outward shifts ( inward SRAS shifts ) would show stagflation as both inflation and unemployment increases.
How is demand pull inflation showed on a short run Philips diagram ?
This is shown by moving up and down the curve. As we get closer to full employment, inflations goes up as AD shifts outward.
How is cost push inflation showed on a short run Philips curve ?
Shifting of the Philips curve left and right ( opposite to SRAS ).
With high unemployment, inflationary pressures tend to be weak, why is this ? ( 3)
- there is a negative output gap - spare capacity in the economy.
- high unemployment tilts the balance of wage negotiating power towards employers.
- Real spending is depressed by the reduction in AD. - less demand in the economy essentially.
Explain why falling unemployment and strong economic growth leads to cost push inflation ?
- can lead to Shortages of components and other inputs which increase production costs.
- workers have negotiating power ( with help from trade unions ) to demand higher pay.
What is stagflation ?
A period in an economy where there is high inflation and high unemployement with low growth.
What are the causes of Stagflation ?
- Supply side related ( supply shocks i.e oil crisises )
- demand side related ( use of fiscal and monetary policy to stimulate demand )
- too much money chasing too few goods ( quantitive easing ? )
Give some examples of conflicting macro objectives ?
Economic growth and protection of the environment.
Balance of payments equlibrium and low unemployment
Inflation and low unemployment
Income inequality and economic growth.
Balanced government budget and protection of the environment.
