2.6.4: Possible Conflicts between Macroeconomic Objectives

Question 1

What are the main macroeconomic objectives?

Answer 1

• Economic growth: positive and sustainable growth; the uk, long run trend rate is around 2.5%
• Low inflation: UK target is 2%
• Low unemployment (e.g around 3%)
• Current account- balance of payments (avoid unsustainable current account deficit)
  -Low government borrowing/ public sector debt
• Exchange rate stability

Question 2

What are some of the possible macroeconomic conflicts?

Answer 2

• Economic growth vs Inflation
• Unemployment vs Inflation
• Economic Growth vs Current account balance of payments
• Budget deficit vs Economic Growth
• Economic Growth vs Environment

Question 3

Economic Growth vs Inflation

Answer 3

• If there is rapid economic growth, it is more likely that inflationary pressure will increase.
• Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS
• When the economy is growing very quickly, firms can have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices.
• If demand grows faster than supply, inflation rises

Question 4

Example of conflict between economic growth and inflation

Answer 4

• The Lawson boom, Uk had (4% to 5% a year) of economic growth.
• This growth rate was above the long run trend rate of growth but caused inflationary pressure to increase.
• This economic boom in the 80s was unsustainable and led to a recession in 1991.

Question 5

Economic Growth vs Balance of Payments

Answer 5

• When economic growth is led by consumer spending, it tends to cause a deficit in the current account.
• This is as when consumer spending rises, there will be a rise in import spending.
• Also high economic growth may increase inflation and make exports less competitive.