Conflicts of Economic Objectives Flashcards
What is the impact of Economic growth on inflation?
Growth leads to increased Inflation.
(AD curve shifts rightwards and leads to a higher overall price level PL)
BUT this depends on how much spare capacity there is in the economy (if the AD curve is at the horizontal part of the LRAS then no change in PL)
What is the impact of high employment on inflation?
High employments leads to increased inflation.
(the more employment, the more competitive firms become over employment, so the higher wages they are willing to offer, so wage inflation)
– (increased wages = increased CoP for firms, increased disposable income, increased consumption, hence inflation pressures)
What is the impact of Economic Growth on the current account?
Economic growth leads to reduced current account.
(increase AD = increased incomes = increased spending = increased spending on imports)
BUT, if the growth is export led then the increase in imports will be balanced out by export.
How does high employment and economic growth impact the economy?
increased growth and employment leads to increased pollution, road congestion and air travel. AND increased resource depletion.
BUT if the gov. reinvests into green factors of production and environmental tax.
What is the impact of economic growth on income distribution (equality)?
Increased growth leads to more income inequality.
(the rich who generate the growth will take most of the gains)
BUT overtime it may lead to an increased demand of low-skilled labour and therefore higher wages for them.
What is the impact of inflation on the current account?
increased inflation leads to worse current account.
obvious: increased inflation leads to worse price competitiveness so worse current account.
ALSO: inflation is controlled by raising interest rates, which is attractive to foreigners to by more £s, increasing exchange rate, which lowers (X-M).
