Conflicting Macroeconomic Objectives

Question 1

Which objectives conflict with economic growth?

Answer 1

Inflation
Current account
Budget Deficit
Environment

Question 2

Which conflict of objectives is illustrated by the Phillips curve?

Answer 2

Unemployment vs Inflation

Question 3

Describe the conflict between economic growth and inflation.

Answer 3

• If there is rapid economic growth, inflationary pressures will increase.
• Inflation is particularly likely to occur when growth is above the long run trend rate, and AD is growing faster than AS.
• When the economy is growing quickly, firms have difficulty employing sufficient skilled labour - this leads to wage inflation and higher wages lead to higher prices.
  If AD is growing faster than AS, then firms will respond to shortages by raising prices

Question 4

When is it possible for growth and inflation not to conflict?

Answer 4

When LRAS increases while AD increases, we see rises in output and real GDP however no inflationary pressure.
This occurs when growth is sustainable, such as the use of supply side policies that increase AD and LRAS together.

Question 5

Describe the conflict between economic growth and the current account on the balance of payments.

Answer 5

• Growth led by consumer spending
• increased imports
• deficit in current account (X-M)

Question 6

When is it possible for growth and the current account not to conflict?

Answer 6

When growth is export led.

Question 7

Describe the conflict between economic growth and the budget deficit.

Answer 7

If the government decides to reduce the budget deficit, it will lower spending and raise taxes. This tightening of fiscal policy will lead to a fall in AD and lower economic growth.
And vice versa, if the government want to stimulate growth, they may pursue expansionary fiscal policy, raising spending and lower taxes, however this will worsen the budget deficit

Question 8

Evaluate the conflict between the budget deficit and economic growth.

Answer 8

Reduction of a budget deficit

• could lead to unemployment and lower growth.
• would need to spend more on welfare benefits and they would collect lower tax receipts.
• Therefore deficit only sees small reduction

However depends on methods of reducing a budget deficit.

• raise retirement age and increased difficult of getting welfare benefits
• then can reduce government spending without negative impact on growth
• in fact, people have to work longer increasing LRAS
• potential issues with this of equality and fairness

Question 9

Describe the conflict between economic growth and the environment.

Answer 9

• Higher GDP
• higher levels of pollution
• higher levels of consumption of non-renewable resources

Question 10

When is it possible for growth and the environment not to conflict?

Answer 10

With growth comes technological innovation

• includes production of green technology such as solar panels
• Solar panels has increased energy productivity but also better for the environment than burning coal.

Question 11

Describe the conflict between unemployment and inflation. (demand pull inflation)

Answer 11

A reduction in unemployment

• people on the Job Seekers Allowance now gain a wage that is higher than the JSA
• increases earnings
• increases disposable income
• increases consumer demand
• increases aggregate demand (C + I + G + (X-M))
• increase in the price level
• DEMAND PULL INFLATION

Question 12

Describe the conflict between unemployment and inflation (cost push inflation)

Answer 12

When unemployment falls

• Available labour becomes more scarce
• increases in wages
• increases business costs
• higher costs passed on to consumers through higher prices
• COST PUSH INFLATION