3.4 possible conflicts between macro economic policy

Question 1

what are the outcomes of negative output gaps

Answer 1

higher unemployment

low inflationary pressures

Question 2

what are the outcomes of positive output gaps

Answer 2

low unemployment

inflationary pressure

Question 3

what does the Phillips curve suggest

Answer 3

a trade of between unemployment and inflation = both can’t be low

Question 4

what does the short run Phillips curve show

Answer 4

if unemployment went down there would be increased inflationary pressure and if unemployment went up inflationary pressure would fall

Question 5

what would the effects on higher unemployment be on inflation

Answer 5

if unemployments high there’s lots of competition for vacancies so firms can keep wages low so there is less cost push inflationary pressure, as people are unemployed they will have less disposable income so AD will be low, less chance of demand pull inflation

Question 6

what would the effects of lower unemployment be on inflation

Answer 6

if unemployment is low then the labour market is ‘tight’ and firms need to offer higher wages to attracts and keep workers, workers also have more power to ask for higher wages, possible triggering cost push inflation
with high employment then workers may have more disposable income which could increase AD, possibly leading to demand pull inflation

Question 7

what are the implication for government policy

Answer 7

governments can aim for either low unemployment or low inflation, not both. ASK ABOUT SOLUTIONS