2.6.4 Conflicts and Trade-offs Between Objectives and Policies

Question 1

Why do conflicts occur

Answer 1

Near impossible to achieve a number of macroeconomic objectives at one time

Tradeoff or choices are need to be made

Question 2

What are the 5 main conflicts that occur between macro-objectives

Answer 2

1. Unemployment and inflation (Philips curve)
2. Economic growth and inflation
3. Economic growth and balance of payments
4. Economic growth and equality
5. Per capita income and environmental degradation

Question 3

Describe the conflict between economic growth and inflation

Answer 3

When supply is inelastic = low spare capacity is when rates of accelerating inflation are high

Leads to stagflation - high inflation, slowdown of economic growth

Question 4

Describe conflicts between Economic growth and BoP

What does it depend on

Answer 4

Depends on the YED for internationally traded goods

When incomes are rising can lead to more imports

High levels of inflation may mean people look to the international market

Businesses may need to import raw materials + commodities to expand production

Question 5

What are ways to overcome the conflicts between BoP and economic growth

Answer 5

supply-side

depreciation exchange rate, due to lower interest

Question 6

What is the Philips curve

Answer 6

Shows a trade-off between inflation and unemployment

A demand-side policy to reduce unemployment could conflict with price stability

Question 7

Describe the elastic part of the Philips curve

Answer 7

Where there is spare capacity (high unemployment) the wage pressure is likely to be low

Bargaining power is low, because someone can be easily replaced

Question 8

Describe the inelastic part of the Philips curve

Answer 8

As unemployment falls, shortages in labour may increase wage inflation

High unit costs of businesses will push onto higher wage claims = demand-pull inflation

Question 9

What is a neo-classical economist outlook on the Philips curve

Answer 9

in the long run, output will always return to the long-run equilibrium path

The economy will revert to a level of output where unemployment returns to the natural rate

Long run Philips curve is drawn as vertical (perfectly inelastic)

Question 10

What are the trade-off with unemployment and inflation

Answer 10

1. Improved labour mobility incentives
2. Impact on skilled migrant workers
3. reduced bargaining power
4. effect on globalisation

Question 11

Some economist think structural and frictional unemployment has fallen due to

Answer 11

efficiency due to technology