2.6.4 Conflicts and tradeoffs between objectives

Question 1

What is the conflict of OBJECTIVES regarding Protection of the Enviroment?

Answer 1

- ECONOMIC GROWTH -
As the economy grows, more resources will be used and produced.
- Economic growth in China has been RAPID but it has led to serious levels of pollution.

Question 2

What is the conflict of OBJECTIVES regarding the Balance of Payments?

Answer 2

- ECONOMIC GROWTH -

As people get Richer and AD grows, then people import more worsening the BoP and putting into a deficit.

Also as countries develop they also produce less as they move out of a industrial economy and start importing more.

Question 3

What is the conflict of OBJECTIVES regarding unemployment?

Answer 3

- INFLATION -
* Low unemployment can lead to higher demand for goods and services, which can cause prices to rise (inflation).

• High inflation might force central banks to raise interest rates to cool down the economy, which can increase unemployment as borrowing becomes more expensive and spending slows.
• Firms pass on increases in wages to the customer in increased prices

USE THE SHORT RUN PHILIPS CURVE - Rate of inflation on Y and Rate of unemployment on X with a “L” like shape.

Question 4

What are the conflict between POLICIES?

Answer 4

Expansionary policies (monetary/fiscal) will increase AD/output/employment/economic growth but will lead to increased inflation and worsen the BoP. ViceVersa.

An increase in** Interest Rates** will decrease inflation, but long term high IR will decrease investment and long term growth.