Conflicts and trade- offs between objectives and policies Flashcards
What are the key macroeconomic objectives?
Economic Growth: Increase in the production of goods and services in an economy over time.
Low Unemployment: Keeping the unemployment rate at a low level, ensuring that those willing and able to work can find jobs.
Price Stability: Maintaining a low and stable rate of inflation.
Balanced Balance of Payments: Ensuring that the total value of exports equals the total value of imports over a period.
Potential conflicts between economic growth and price stability:
Rapid economic growth can lead to inflationary pressures as demand outstrips supply.
Example: The 1970s oil crisis led to stagflation (high inflation and low growth).
Diagram: Phillips Curve showing trade-off between unemployment and inflation.
Potential conflicts between low unemployment and price stability:
Policies to reduce unemployment, such as lowering interest rates, can increase inflation.
Example: Post-2008 financial crisis, central banks reduced interest rates to combat unemployment, leading to concerns about inflation.
Potential conflicts between Economic growth and environmental stability stability:
Pursuing high growth can lead to environmental degradation.
Example: Rapid industrial growth in China has led to severe pollution issues.
Potential conflicts between Economic growth and balance of payments:
High growth can lead to increased imports, causing trade deficits.
Example: The US has often run trade deficits during periods of strong economic growth.
Potential conflicts between Unemployment and Balanced budget:
Reducing unemployment may require government spending, leading to budget deficits.
Example: During recessions, governments often increase spending to boost employment, raising public debt.
Philips curve:
Philips curve - as unemployment decreases Inflation increases due to the increased consumption and demand.
