3.3 Macroeconomic Objectives — Conflict Between Objetives

Question 1

Conflict between low unemployment and low inflation

Answer 1

inverse relationship between inflation in the economy and the rate of unemployment.

In deflationary gaps the rate of inflation is low but high cyclical unemployment - as economy approaches potently output, inflation occurs and cyclical unemployment decreases

This is based on the increasing inflationary pressure (due to increase AD) mean resources are being used fully, giving rise to higher wages and other resource prices - gives rise to higher product prices and hence rising price level

Question 2

What is the Philips curve

Answer 2

Relationship between unemployment and inflation

Negative relationship between the two variables

Short term + long term Philips curve

Question 3

Explain the short run Philips curve

Answer 3

A negative relationship between the rate of inflation and unemployment rate, short run policy makers can choose between low inflation or low unemployment

Question 4

Explain long run Philips curve

Answer 4

Is vertical at natural rate of unemployment, suggesting unemployment is independent of rate of inflation and policy makers do not have a choice between them

The only impact of an increase in AD is to increase inflation, while level of real output and unemployment remain unchanged

Question 5

High economic growth vs low inflation

Answer 5

Demand pull inflation and economic growth:
- increases in AD
- leads to increase in general price level
- economic growth leads to higher inflation

Cost push inflation and economic growth:
- decreases in SRAS
- increase in price level and fall in economic growth, known as stagflation
- not possible to have positive economic growth at the same time as price level rising