Conflicts And Trade-offs Between Objectives Flashcards
Economic growth vs inflation
A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increased faster than AS.
Economic growth vs the current account
During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit. However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.
Economic growth vs the government budget deficit
Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth.
Economic growth vs the environment
High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.
Unemployment vs inflation
In the short run, there is a trade off between the level of unemployment and the inflation rates. This is illustrated with a Phillips curve.
As economic growth increases, unemployment falls due to more jobs being created. However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.
The extent to this trade off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages.
Potential policy conflicts and trade-offs
This occurs when one macroeconomic policy has a larger impact than another, which conflicts with the other policy or reduces its effectiveness. Every policy is likely to have unintended consequences.
Potential policy conflicts and trade-offs: environmental vs competitiveness
If ‘green taxes’ are implemented, such as carbon taxes, or if there are minimum prices on pollution permits, the competitiveness of domestic firms could be compromised. This is because they are limited in their production.
Potential policy conflicts and trade-offs: fiscal vs monetary policy
Expansionary fiscal policies involve more government borrowing, which could cause interest rates and the inflation to rise.
Potential policy conflicts and trade-offs:interest rate vs inequality
The low interest rate could affect distribution of income. Savers only receive a small return on their savings.
