2.6.4 Conflicts and trade-offs between objectives and policies

Question 1

What do policy decisions often create?

Answer 1

Policy decisions by governments often create a trade-off in the macroeconomic objectives.

Question 2

Explain the trade-off of economic growth and inflation?

Answer 2

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 3

Explain the trade-off of economic growth and environmental sustainability?

Answer 3

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

Question 4

Explain the trade-off of economic growth and inequality?

Answer 4

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 5

Explain the trade-off of economic growth and balanced budget?

Answer 5

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

Question 6

Explain the trade-off of economic growth and balancing the current account?

Answer 6

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

Question 7

Explain the trade-off of low unemployment and low inflation?

Answer 7

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