2.6.4 conflicts and trade-offs between objectives and policies Flashcards
What is the Phillips curve?
Comments that a shortage of labour may lead to an increase in wages . There may be a trade-off between reduced unemployment and increased inflationary pressure. This is based on the classical view that when supply of labour is greater than demand (unemployment), this is caused by wages being too high.
What is the trade off between economic growth and the current account of the BOP?
If the economy grows quickly, there is likely to be more demand for imports and exports are reduced as goods can be sold to domestic consumers instead. However, export-led economic growth can lead to an improvement on the current account of the BOP.
What is the trade off between environmental protection and economic growth?
Growth may damage the environment if there is increased manufacturing involved, however service based growth may not damage the environment. Increased incomes from growth may also enable countries to convert to renewable resources or tighten environmental regulation.
What is the conflict/trade off between government spending and supply in the economy?
An increase in government spending is likely to directly impact the supply-side of the economy positively, improving healthcare and education. However, increased spending may cause supply problems in the short run, leading to demand-pull inflationary pressure in the economy.
How can increased interest rates conflict with the supply-side of the economy?
Increasing interest rates to control inflation can damage the supply-side of the economy. Higher interest rates may decrease investment within the economy, leading to cost-push inflationary pressures while reducing demand-pull inflationary pressures.
What are some examples of conflicts and trade offs between macroeconomic objectives?
- economic growth v environmental protection
- economic growth v balance of payments
- unemployment v inflation
What are some examples of conflicts and trade offs between policies?
- expansionary/deflationary monetary and fiscal policies
- changes in interest rates
- supply side policies
What are some conflicts and trade offs of expansionary/deflationary monetary and fiscal policies?
Expansionary policies will increase AD, output, employment and economic growth but can cause increased inflation and worsen the balance of payments. Deflationary policy decreases AD to improve inflation but will decrease employment and growth.
What are the conflicts/trade offs with changes in interest rates?
An increase in interest rates is used to decrease inflation. However, continuously high rates damage long-term investment, decreasing long-term growth. Also, the value of the pound will be raised, decreasing exports and increasing imports, worsening the balance of payments. Also impacts distribution of wealth, as high interest rates benefit savers and lenders, this tends to be older people with more savings, increasing their wealth.
What are some conflicts/trade offs with supply side policies?
Supply side policies tend to increase aggregate supply, improving long term economic growth. They can decrease long term inflation but may increase it in the short term if higher investment increases AD. Policies which decrease trade union power, reduce wages, lower benefits, changes in taxation can increase income inequality as they negatively impact the poorest groups within the economy.
What are some conflicts/trade offs associated with reducing fiscal deficits?
The government may decide to reduce government spending and increase taxes. This reduces AD, reducing short term economic growth and leading to higher unemployment. The higher the fall in output, the higher the fall in tax revenues and the more ineffective the policy is. Likely to affect income equality as the poor are the ones who benefit most from government services and they are worst affected by these polices,
