3.4 Possible Conflicts Between Macroeconomic Policy Objectives Flashcards
Policy conflict defenition
Attempts to achieve one economic objective causes a move further away from achieving another economic objective
How do output gaps lead to conflicts
- negative output gap = below trend growth rate = low prices but high unemployment
- positive output gap = actual growth is above trend = high levels of economic growth but inflation
Phillips curve definition
A curve depicting the inverse relationship between the level of unemployment and the rate of inflation.
What does the short-run Phillips curve show?
Shows that when unemployment falls inflation will rise and vice versa
Describe the theory of the short-run Phillips curve
- when unemployment is low trade unions and workers feel more confident in claiming higher wages
- as less likely for them too looks their jobs because or labour shortages
- the higher wages are then passed on as higher prices to consumers = inflation
Money illusion definition
Where workers in the short run confuse nominal wages and real wages
Adaptive expectations definition
Where workers take time to adjust their expectations of the inflation rate to match the actual inflation rate
What is the difference between short-run and long-run Phillips curve?
Short-run, higher wages demanded leads to higher inflation = higher prices
Long-run, higher wages demanded leads to increase in unemployment as workers are laid off to reduce cost of production
What is the principal of the long-run Phillips curve?
That the unemployment rate will always return back to the natural rate of unemployment
What is the principal of the short-run Phillips curve?
Workers experience money illusion where any rise in inflation is not initially recognised by workers in having a reduced their real wages
Was does the long-run Phillips curve look like?
A vertical straight line (LRAS curve)
What is NAIRU stand for?
Non-accelerating inflation rate of unemployment
Definition of NAIRU
The rate of unemployment consistent with a constant rate of inflation.
It is determined by structural and frictional issues within the economy and can be affected by changes in policy.
What policy objectives need increased AD?
- short-run economic growth
- reducing cyclical unemployment
- eliminating a budget deficit
Why does an increase in AD lead to elimination of a budget deficit?
If AD increases = more spending = more taxes
