2.6.4 Conflicts and tradeoffs between objectives and policies

Question 1

How does increasing tax lead to an improvement in the balance of payments

Answer 1

AD shifts to the left
Less disposable income
Less spent on imports

Question 2

How does increasing tax lead to unemployment rise

Answer 2

AD shifts to the left
RNO and economic growth falls
Increase in unemployment

Question 3

What did the Phillips curve show about inflation rates and employment

Answer 3

There is a trade-off between certain levels of unemployment and inflation rates
Leads to excessive AD increasing demand full inflation
Workers may also demand high wages increasing cos push inflation

Question 4

What is the flaw with the original Phillips curve

Answer 4

Doesn’t recognise changes in the supply side of the economy eg change in oil prices
Only effective in the short-run

Question 5

What is stagflation and when did it occur

Answer 5

Period of increasing inflation
but falling output
Rising unemployment

Occured in 2008 with rise in price of oil and a global recession

Question 6

What is the conflict between inflation and unemployment (3)

Answer 6

Reduction of unemployment

• Higher demand for workers
• Increase in wages
• Extra cost may be pushed on to the consumers -leading to cost-push inflation

Question 7

What is the conflict between economic growth and environmental protection (3)

Answer 7

• Economic growth leads to more productivity
• Increases the use of natural resources
• Increases pollution

Question 8

What is the conflict between economic growth and inflation

Answer 8

• Fast economic growth leads to an increase in demand
• Increase in price
• High inflation

Question 9

What is the conflict between economic growth and balance of payments

Answer 9

Low inflation than in other countries
There is an increase in exports than imports
A surplus on the balance of payment

However low inflation is maintained by high-interest rates
Leads to foreign investment
Makes currency stronger
Exports are less competitive

Question 10

What is the conflict between government taxation and inflation (long-run and short-run)

Answer 10

In the short run, an increase in tax eg VAT will increase price increasing inflation

However, in the long run higher prices leads to fall in demand leading to lower inflation