Conflicts between macroeconomic policy objectives Flashcards
examples of policy conflicts:
- 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
what happens if there is rapid economic growth?
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
when economy is growing very quickly, firms have difficulty employing skilled labour which can lead to what?
wage inflation and higher wages cause higher prices
persistently high inflation rate can effect what?
negative effects on trade balance, profit of firms and jobs and ultimately economic growth
attempts to control inflation by higher interest rates may cause what?
the exchange rate to appreciate and this can reduce price competitiveness of exporting industries and damage economic growth
is it possible to have economic growth without causing inflation?
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
when economic growth is led by consumer spending it tends to cause what?
tends to cause a deficit in the current account
when real incomes are rising at a rapid rate, consumers tend to buy what?
more imports leading to worsening of the trade balance
fast growing countries may suffer from high inflation which worsens what?
the competitiveness of domestic industries including exporters. businesses will need to import extra raw materials, components and capital equipment to help expand production
if economic growth is export led then there can be an increase in what without causing what
an increase in economic growth without causing a current account deficit
describe budget deficits in boom recession and conflict:
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
as the rate of unemployment falls, labour shortages may cause an?
increase in wage inflstion and higher unit labour costs
when an economy is booming, so does the derived demand for and prices of components and raw materials what does this lead to?
higher costs
rising demand and falling unemployment can lead to what?
suppliers raising their prices to increase their profit margins
how can you reduce both inflation and unemployment?
- 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