2.6.4 Conflicts and trade-offs between objectives and policies links to Fiscal

Question 1

Meaning of trade-offs (between macroeconomic objectives)

Answer 1

Achieving one objective may come at the cost of worsening progress in another objective.

Question 2

The Short Run Phillips Curve

Answer 2

The short run Phillips curve shows an apparent trade-off between inflation and unemployment. By plotting historical inflation and unemployment data, the economist A.W. Phillips found that as inflation falls, unemployment rises, and vice versa.

So it looks like if the government wants to reduce unemployment, then it can increase aggregate demand to achieve this – as long as it’s prepared to accept higher inflation.

One problem is that once inflation has gone up, people seem to expect it to remain high, and they change their behaviour accordingly.

Question 3

Trade off between Economic Growth and Inflation

Answer 3

Increasing economic growth causes the economy to move closer to full employment.
Prices for remaining resources are bid up leading to inflation which may outpace the target inflation rate of 2%.

Question 4

Trade off between Economic Growth and Environmental Sustainability

Answer 4

Economic growth often increases pollution, negative externalities and the depletion of non-renewable resources.

The higher the growth, the faster the depletion.

Question 5

Trade off between Economic Growth and Inequality

Answer 5

During periods of high economic growth, the profits the owners of the factors of production receive are disproportionate to any increase in workers’ wages leading to greater inequality.

Question 6

Trade off between Economic Growth and a Balanced Budget

Answer 6

Economic growth driven by expansionary fiscal policy often requires a budget deficit.

Question 7

Trade off between Economic growth and Balancing the Current Account

Answer 7

Economic growth usually leads to higher incomes which leads to an increase in imports by households thereby worsening the current account balance.

Question 8

Trade off between Low unemployment and Low Inflation

Answer 8

The closer an economy moves to full employment the less workers will be available for hire and wage inflation will help increase overall inflation.

Question 9

What does the laugher curve look like

Answer 9

Question 10

What does the laugher curve suggest

Answer 10

Suggests the relationship between economic activity and the rate of taxation which suggests there might be an optimum tax rate which maximises total tax revenue

Question 11

What does it mean about the optimal tax rate if you draw a symmetrical laugher curve

Answer 11

It suggests the optimal tax rate is 50%