conflicts between the macroeconomic objectives

Question 1

macro economic goal - low employment - positive/negative output gap

Answer 1

postive output gap - A positive output gap is associated with higher levels of GDP in the economy, firms operate near or at full capacity
The demand for labour is high, leading to lower unemployment rates

negative output gap - A negative output gap is associated with low levels of economic growth
There is excess capacity and unused resources in the economy.
Firms may not be operating at full capacity, leading to layoffs and a higher unemployment rate

Question 2

macro economic goal - low and stable inflation- positive/negative output gap

Answer 2

postive output gap -upward pressure on prices and wages
With firms operating at or near full capacity, they may struggle to meet increasing demand, leading to higher production costs
As a result, firms may raise prices, contributing to inflationary pressures
Additionally, low unemployment can empower workers to demand higher wages, further fueling inflation

Negative output gap - downward pressure on prices and wages.
High unemployment reduces workers bargaining power, making it difficult for them to negotiate higher wages
As a result, firms may not face significant cost pressures, and there is a risk of deflation or very low inflation