2.6.4 Comflicts + Trade-offs Flashcards
What do policy decisions by governments often create?
A trade-off in the macroeconomic objectives
What is the relationship between economic growth and inflation?
Increasing economic growth moves the economy closer to full employment, but prices for remaining resources are bid up, leading to inflation that may outpace the target inflation rate of 2%.
How does economic growth affect environmental sustainability?
Economic growth often increases pollution, negative externalities, and the depletion of non-renewable resources; the higher the growth, the faster the depletion.
What is the impact of economic growth on inequality?
During periods of high economic growth, the profits the owners of the factors of production (FOP) receive are disproportionate to any increase in workers’ wages, leading to greater inequality.
How does economic growth relate to a balanced budget?
Economic growth driven by expansionary fiscal policy often requires a budget deficit.
What is the effect of economic growth on the current account?
Economic growth usually leads to higher incomes, which increases imports by households and worsens the current account balance.
What is the relationship between low unemployment and low inflation?
As the economy moves closer to full employment, fewer workers are available for hire, leading to increased wage inflation and overall inflation.
What does the Short-run Phillips Curve (SRPC) observe?
It observes that there may be a trade-off between unemployment and inflation.
What accompanies rising inflation?
Falling unemployment.
What accompanies rising unemployment?
Falling inflation.
What does an increase in aggregate demand (AD) cause?
A positive output gap, as increased output raises the demand for labor, reducing unemployment.
What does a decrease in aggregate demand (AD) cause?
A negative output gap, as decreased output reduces the demand for labor, increasing unemployment.
How does contractionary monetary policy cause trade-offs and conflicts (TO&C)?
Raising interest rates eases demand-side inflationary pressure but raises the cost of borrowing for firms, slowing down supply-side investment.
How does expansionary fiscal policy cause trade-offs and conflicts (TO&C)?
An increase in government spending can improve the supply side of the economy in long-run aggregate supply (LRAS), but may cause a shortage in short-run aggregate supply (SRAS) due to excess demand, leading to inflation.
How do environmental policies cause trade-offs and conflicts (TO&C)?
Increased environmental policies may lead to a fall in economic growth and lower LRAS, as fossil fuel industries have traditionally enabled increases in LRAS.
