2.6.4 Conflicts and trade-offs between objectives and policies

Question 1

Potential conflicts and trade-offs between the macroeconomic objectives

Answer 1

• Economic growth vs inflation
• Economic growth vs the current account
• Economic growth vs the government budget deficit
• Economic growth vs the environment
• Unemployment vs inflation

Question 2

Economic growth vs inflation: potential conflicts and trade-offs between macro objectives

Answer 2

A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increases faster than AS.

Question 3

Economic growth vs the current account: potential conflicts and trade-offs between macro objectives

Answer 3

During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit. However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.

Question 4

Economic growth vs the government budget deficit: potential conflicts and trade-offs between macro objectives

Answer 4

Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, and as a result there will be less economic growth.

Question 5

Economic growth vs environment: possible conflict and trade-offs between macro economic objectives

Answer 5

High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.

Question 6

Unemployment vs inflation (Phillips curve): possible conflict and trade-offs between macro objectives

Answer 6

In the short run, there is a trade-off between the level of unemployment and the inflation rate. This is illustrated with a Phillips curve.
As economic growth increases, unemployment falls due to more jobs being created. However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.
- The extent of this trade off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages.

Question 7

Potential policy conflicts and trade-offs

Answer 7

This occurs when one macroeconomic policy has a larger impact than another, which conflicts with the other policy or reduces its effectiveness. Every policy is likely to have unintended consequences; these are some examples:
- Environment vs competitiveness
- Fiscal vs monetary policy
- Interest rate vs inequality

Question 8

Environment vs competitiveness: potential policy conflicts and trade-offs

Answer 8

If ‘green taxes’ are implemented, such as carbon taxes, or if there are minimum prices on pollution permits, the competitiveness of domestic firms could be compromised. This is because they are limited in their production.

Question 9

Fiscal vs monetary policy: possible policy conflict and trade-off

Answer 9

Expansionary fiscal policies involve more government borrowing, which could cause interest rates and the inflation rate to rise.

Question 10

Interest rate vs inequality: potential policy conflicts and trade-offs

Answer 10

The low interest rate could affect the distribution of income. Savers only receive a small return on their savings.

Question 11

Potential policy conflicts and trade-offs synoptic point *

Answer 11

Some microeconomic policies could have adverse macroeconomic impacts and vice versa, for example indirect taxes to fix market failure could reduce competitiveness and decrease SRAS.