Conflict of Objectives Flashcards
What are the objectives of the goverment?
- Inflation target of 2% (+/- 1%)
- Economic growth
- Full Employment
- Balance of payment equilibrium
- Balanced budget
- Current account equilibrium
- Reduced inequality
- Environmental sustainability
How does stable prices conflict with full emplyment ?
Philips curve states that as unemployment decreases, inflation increaces
draw philip curve
When AD increaces, unemployment falls but tradeoff is inflation
Philips curve relationship can be shown using AD AS Curve
However: If SRAS is increased, inflation and unemployment both falls and so Philips curve breaks down
How does economic growth conflict with current account deficits?
Increase in AD caused by an increase in consumption could lead to economy growing faster than it’s potential causing a worsening of the current account defecit as imports increase
However: Does not happen in economies such as China and Germany whos growth has been exported led leading to growth and current account surplus
How does economic growth conflict with income inequality?
Economic growth can lead to level of inequality in a society getting worse which can be shown by KUZNETS CURVE
As we move from GDP A to GDP B, Gini coefficient rises because wealth creators are beneficiaries of incomes creates by growth which in early stages will not be shared
However: Over time the govt will establish a tax system which allows for incomes to be redistributed and the benefits of the economic growth will trickle down to rest of society which can be seen by moving from GDP C to GDP D
How does economic growth conflict with inflation?
Increase in AD leads to economic growth but if economy is near spare capacity or at full employment and AS does not increase, there will be inflationary pressure as firms try to find spare land and labour, and costs will rise
However: Depends on the size of output gap and amount of spare capacity in economy. Also depends if growth is caused by AD or AS
