2.6.4 - Conflicts and Trade-offs between Objectives and Policies

Question 1

What are the 6 main Macro-Economic Objectives?

Answer 1

1. Positive/Sustainable Growth (UK: +2.5%)
2. Low Inflation (UK target 2%)
3. Low Unemployment / Full Employment (e.g. around 3%)
4. Satisfactory Current Account on the Balance of Payments (i.e avoidance of big current account deficit)
5. Low Govt. Borrowing
6. E/R Stability

Question 2

Why does Conflict occur between the objectives of Economic Growth and Inflation?

Answer 2

When Economy expands, more likely that** inflationary pressures** increase.

Inflation is particularly likely to occur when growth is above the long run trend rate and AD increases faster than AS.

Question 3

Give an example of Inflationary Growth:

Answer 3

• Late 1980s, Lawson Boom
• UK experienced high rate of economic growth (4-5% a year)
• Growth rate above the LR trend rate of growth, caused inflationary pressure
• When economy grows quick, firms struggle to employ sufficient skilled labour
• Quick Growth may constrain supply, pushing up commodity prices
• Boom of the ’80s proved unsustainable and led to recession in ‘91 (govt. increased interest rates to control inflation)