Conflicts between macroeconomic policy objectives Flashcards

1
Q

examples of policy conflicts:

A
  • internal policy: full employment and growth, external policy of satisfactory balance of payments
  • low unemployment and controlling inflation
  • increasing rate of economic growth and more equal distribution of income and wealth
  • higher living standards now and in the future
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2
Q

what happens if there is rapid economic growth?

A

more likely that inflationary pressures will increase. infaltion more likely to occur when growth is above long run trend rate and AD increase faster than AS

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3
Q

when economy is growing very quickly, firms have difficulty employing skilled labour which can lead to what?

A

wage inflation and higher wages cause higher prices

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4
Q

persistently high inflation rate can effect what?

A

negative effects on trade balance, profit of firms and jobs and ultimately economic growth

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5
Q

attempts to control inflation by higher interest rates may cause what?

A

the exchange rate to appreciate and this can reduce price competitiveness of exporting industries and damage economic growth

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6
Q

is it possible to have economic growth without causing inflation?

A

yes if growth is sustainable- if it is close to the long run trend rate, then LRAS will increase at the same rate as AD

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7
Q

when economic growth is led by consumer spending it tends to cause what?

A

tends to cause a deficit in the current account

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8
Q

when real incomes are rising at a rapid rate, consumers tend to buy what?

A

more imports leading to worsening of the trade balance

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9
Q

fast growing countries may suffer from high inflation which worsens what?

A

the competitiveness of domestic industries including exporters. businesses will need to import extra raw materials, components and capital equipment to help expand production

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10
Q

if economic growth is export led then there can be an increase in what without causing what

A

an increase in economic growth without causing a current account deficit

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11
Q

describe budget deficits in boom recession and conflict:

A

boom: decrease government benefits spending, increased tax revenue, decrease deficit
recession: higher deficit
conflict: decreased deficit-> lower gov spending or higher tax revenue -> lower AD which leads to lower economic growth

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12
Q

as the rate of unemployment falls, labour shortages may cause an?

A

increase in wage inflstion and higher unit labour costs

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13
Q

when an economy is booming, so does the derived demand for and prices of components and raw materials what does this lead to?

A

higher costs

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14
Q

rising demand and falling unemployment can lead to what?

A

suppliers raising their prices to increase their profit margins

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15
Q

how can you reduce both inflation and unemployment?

A
  • successful supply-side policies are used, can reduce structural unemployment without causing wage inflation
  • expectation of inflation remains stable so firms dont face an acceleration in wage demands
  • economy is flexible enough to cope with external demand and supply-side shocks
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16
Q

other conflicts:

A
  • policies designed to meet environmental goals might damage the competitiveness of domestic businesses in international markets
  • measures to reduce inequality such as higher top rate income taxed or increased VAT on luxury products
  • effects of changes in interest rates on the distribution of income
  • expansionary fiscal policies involving higher government borrowing that have the effect of driving inflation and IR higher
17
Q

external shocks can help relieve conflicts or make them worse. what do free-market economists believe?

A

that sucessful supply-side policies, combined with supply-side reform in the private sector, facilitate the production of high-quality goods and services

18
Q

what is crowding out?

A

public sector borrowing to compensate for market failures and provide public and merit goods, might drive up long term interest rates and crowd out private sector investment

19
Q

keynesian approach to reconciling conflicts:

A
  • no crowding out
  • multiplier effect is highly significant
  • reducing unemployment more important than controlling inflation
  • LRAS can be horizontal
  • generally advocate fiscal policy
  • government should borrow more during recession and run budget deficit
  • wages can be sticky causing unemployment
20
Q

monetarists approach to reconciling conflicts:

A
  • gov spending crowds out private sector investment
  • control of money supply is crucial in keeping inflation low
  • more important to keep inflation low than control unemployment
  • LRAS curve is very steep in nature
  • generally advocate monetary policy
  • government should seek to balance the budget
  • wages are flexible in absence of minimum wages or trade