2.6.4: Conflicts & Trade-Offs Between Objectives & Policies

Question 1

Economic Growth vs Inflation

Answer 1

A growing economy is likely to experience inflationary pressures on the average price level, especially is AD increases faster than AS.

Question 2

Inflation vs Balance Of Payments Equilibrium

Answer 2

A rise in inflation results in depreciation of currency, which which makes exports more appealing (increase in demand). This increases net trade, resulting in a surplus.

Question 3

Inequality vs Economic Growth

Answer 3

In periods of high economic growth, the profit increase for owners of the factors of production are disproportionate to any increase in workers’ wages.

Question 4

Economic Growth vs Environment

Answer 4

Economic growth results in negative externalities, such as pollution (e.g. manufacturing is linked to high CO2 levels).

Question 5

Phillips Curve

Answer 5

Question 6

How did the Phillips curve help businesses?

Answer 6

Businesses know that high unemployment means that they can attract workers with lower wages.

Question 7

How did the Phillips curve get disproven?

Answer 7

During the 1970’s, there was a period of high unemployment and high inflation (stagflation).
The Phillips curve is now deemed a short term curve.

Question 8

Fiscal & Monetary Policy-
Expansionary:
Deflationary:

Answer 8

Fiscal & Monetary Policy-
Expansionary: increases AD, but leads to increased inflation and may worsen the BoP (as demand may be met through imports).
Deflationary: decreases AD to improve inflation, but leads to decreased employment and economic growth.

Question 9

Interest Rates-
Increase:
Decrease:

Answer 9

Interest Rates-
Increase: decreases inflation, but damages long term investment and growth.
Decrease: income inequality (rich people have money in non-money assets, while middle/working class people have money in savings).