Conflict of objectives Flashcards
what does the short run phillips curve show
- an inverse relationship between inflation and unemployment
- in times of low unemployment, wages will rise quickly
why would wage growth increase when unemployment is low
- low unemployment means workers are scarce, they have more bargaining power to push up wages
explain the phillips curve
- low unemployment, AD shifts right, may lead to demand pull inflation
- on a classical diagram, at YFE, there is still some unemployment
- Whenever AD shifts, we move along PC
what is stagflation
periods of both high inflation and high unemployment
evaluation points for phillips curve
- doesn’t explain how we can have periods of stagflation
how do classical economists show stagflation
shift SRAS to the left, P1 to P2 inflation increases, YFE to Y2, unemployment increases
- shift srpc to the right
- shift SRAS right, reduces cost push inflation, increases output(reduces unemployment, shift SRPC left
how would cutting welfare benefits increase AD
- to try and achieve low unemployment, the government may reduce spending on things like welfare benefits
- this could incentivise people to join the labour force, increasing quantity of labour, shifting LRAS. A larger pool of active workers can also stimulate consumer spending, which could increase AD
trade off between reducing unemployment and reducing income inequality
- cutting welfare benefits disproportionately affect’s vulnerable groups, such as low income households/ ppl with disabilities. these people may rely on social assistance to meet their basic needs, and reducing support can push them into poverty and economic hardship , leading to a wider wealth gap between them and richer people who can afford basic necessities without help
evaluation points for conflict between reducing income inequality and reducing unemployment
- size of the cut in welfare tax, if it’s marginal, it still may incentivise the inactive to join the labour force whilst also allowing low income households to access help with their finances
- social acceptance of policy measures, people may not agree with the govt cutting benefits and may do things like protest, could be potential resistance
chain of analysis for the macroeconomic conflict between a increasing economic and keeping low and stable inflation
- for economic growth to happen, there must be an increase in AD or AS
eg - increasedmin wage,increased government spending (eg subsidies) , expansionary fiscal policy, may lower firms cost of production and increase competitiveness between firms(increasing LRAS because there’s higher productive efficiency ) , causing cheaper goods for consumers , this will increase firms retained profit and increase their marginal propensity to consume, increasing AD. - As AD shifts to the right, economic growth increases but demand pull inflationary pressure also increases. this is because there is more spending in the economy
- increasing economic growth could put pressure on scarce resources, causing them to rise in price
evaluation points for conflict between economic growth and inflation
- depends on where the economy is on the trade cycle. if economy is in a recession, government spending could increase AD but not to a large extent, as consumer confidence may be low, business ‘animal spirits’ may be low and decide not to invest
macroeconomic conflict between economic growth and budget deficits
- increased govt spending in infrastructure for example, increases mobility advantage for workers, allowing workers to commute to jobs they may not have been able to previously, this can increase quantity of labour, increasing LRAS. an increase in capital spending may also help firms transport product from one place to another easily, increasing efficiency, increasing LRAS
- increased govt spending, lower COP, increased efficiency, increased retained profit and incentive to spend
- these however, may lead to budget deficits if not accompanied by sufficient revenue generation, eg consumer confidence may be low, may be in a recession, less spending, so govt spending may not impact AD as much. government spending 30% of AD, other factors more important
- if there is a budget deficit, there would be higher government borrowing, putting upward pressure on interest rates, higher interest rates can crowd out private investment (talk abt crowding out effect)
evaluation points for budget deficit vs economic growth
- consumer / business confidence - if it is high, and governemnt invest in the economy, there is higher MPC and MPI
- if govt invest in businesses, they keep more of their profit and could pay their workers more. this may incentivise spending in the economy, and since consumption makes up 60% of AD, there will be economic growth
- progressive income tax, govt tax revenue may increase
context for conflict of objectives
Price Stability and Economic Growth:
Example: In response to the global financial crisis in 2008, central banks, including the Bank of England, implemented expansionary monetary policies such as quantitative easing to stimulate economic growth and prevent deflation. While these policies helped support economic recovery and stabilize financial markets, they also raised concerns about the potential for inflationary pressures in the long run.
what is the long run phillips curve
- describes the natural rate of unemployment
- is a VERTICAL line
