2.6.4 Conflicts with trade offs

Question 1

What is the Philips curve

Answer 1

Displays the relationship between inflation and unemployment

Question 2

Explain the Philips curve

Answer 2

Falling unemployment means a falling supply of workers meaning labour shortages. Which increases bargaining power for workers meaning increased wage costs and increased prices.

Question 3

What are the three examples of macro objective trade offs

Answer 3

Economic growth vs Current account BOP
Economic growth vs environment
Economic growth vs equality

Question 4

Explain the growth and CA trade off

Answer 4

As the economy grows, disposable incomes grow meaning an increase in imports which will reduce our net trade and create a CA deficit. This depends if growth is export led or not.

Question 5

Explain the growth and environment trade off

Answer 5

As the economy grows demand increases meaning manufacturing increases causing damage to the environment e.g through pollution. This depends which sector growth is in and when the country has environmental legislation.

Question 6

Explain the trade off between growth and equality

Answer 6

Economic growth from policies that reduce tax rates for the rich or benefits those with financial assets meaning reduced costs for the rich increasing inequality.

Question 7

Explain the policy trade off created by government spending

Answer 7

Gov spending will increase supply through supply side policies like spending on infrastructure, however will also decreases supply in the short run as it may required increased taxes to fund spending decreasing the incentives to work.

Question 8

Explain the policy trade off created by rises in interest rates

Answer 8

Increasing the interest rates in increase saving which will decrease C+I, this would reduce demand pull inflation, however it would also increase cost push inflation as decreased investment will increase the cost of producing.