2.6.4 Conflicts between objectives and Policies

Question 1

How is there a conflict between unemployment and inflation?

Answer 1

The Phillips curve

—when unemployment is low inflation is high because of rising incomes and increasing marginal propensity to consume

Question 2

How is there a conflict between economic growth and the balance of payments?

Answer 2

Economic growth leads to rising real incomes. Risings incomes leads to an increase in the marginal propensity to import. Happened in the 50s and 60s.

Question 3

How is there a conflict between economic growth and environmental sustainability?

Answer 3

Economic growth is the outcome of industrialisation and therefore damages the environment.
Seen in China in the beginning of the 21st century. CO2 emissions took off rapidly in 2003 following high levels of economic growth.

Question 4

How is there a trade off between monetary and fiscal policy?

Answer 4

High levels of borrowing (fiscal policy) leads to the pushing up of interest rates, as banks have less to spend due to the government. Furthermore, due to the concept of hot money flows, the exchange rate will appreciate affecting the competitiveness of U.K. goods in the global market.
Fiscal and monetary policy coming into conflict