4.11.4 - Conflicts between Macroeconomic Policy Objectives Flashcards
What are the main macroeconomic policy conflicts?
- Full employment and satisfactory BoP
- Low unemployment and controlling inflation
- Increasing rate of econ. growth and more equal income/wealth dist.
- Higher living standards now vs. in the future
What is the main method to increase the rate of econ. growth and provide a more equal income/wealth dist.?
Taxation at an appropriate level.
Ensure that entrepreneurs are not disadvantaged, but ensure that the poor are taken care of to a certain extent as well.
What do free marketeers think about increasingthe rate of econ. growth and providing a more equal income/wealth dist.?
Taxation stifles entrepreneurial and personal incentives. Greater inequalities are necessary to promote the conditions in which rapid and sustainable economic growth can take place.
How do governments solve the issue of short-term living standards improvements against long term?
Quite difficult.
The easiest way to improve short-term living standards is to boost consumption but will sacrifice long run economic growth by redcing saving and investment.
Why do governments reorder their rankings of policy objectives in roughly five year blocks?
To win an election, a government may aim for low unemployment in the months before a general election, and then solving the issue of higher inflation after they win the next election.
What is the Phillips Curve?
The apparent relationship between the rate of inflation and the rate of unemployment.
How is the debate over whether inflation is caused by demand-pull or cost-push factors conducted?
Often supported by the Phillips Curve.
Both demand-pull and cost-push theories of inflation can explain the relationship.
How does the demand-pull theory of inflation explain the Phillips Curve?
The factor causing unemployment to fall is excess demand, which pulls up money wages and the average price level.
How does the cost-push theory of inflation explain the Phillips Curve?
Falling unemployment means that trade union power increases, allowing unions to use their growing monopoly power over the supply of labour to push for higher wages.
How has the long-run Phillips curve been added?
What do free-market economists argue about reducing unemployment below the natural rate of unemployment? and why?
It is impossible.
Except the cost of suggering an ever-accelerating and likely hyperinflation.
The original Keynesian explanation of the (short-run) Phillips curve wrongly took into account only the current rate of inflation and not the expected rates of inflation. If the government increases AD to reduce unemployment below the natural rate, people revise their expectations of future inflation upwards. This will continue and people will behave in a way to make hyperinflation possible.
How do free market economists argue that the natural rate of unemployment can be solved?
Implementing appropriate supply-side policies to shift the long-run Phillips Curve to the left.
Why may more workers enter the labour market in the short-run during periods of inflation?
A money illusion.
They wrongly confuse nominal wage increases with real wage increases.
(Businesses can suffer the same, confusing higher prices with more profits)
