lesson 17 - conflicts between macro objectives

Question 1

What happens when inflation is too high

Answer 1

-one way to reduce inflation is to decrease AD by cutting spending
->recession as rate of economic growth becomes negative

Question 2

what happens when growth is too low

Answer 2

gov tries to increase AD, lowering unemployment, but also causing inflation
-> rise in imports as income increases-> deteriation of the balance of payments
-gov can also raise LRAS growth -> fall in wage rates and inequalities in income

Question 3

what happens when unemployment is too high

Answer 3

-raise AD
->inflation rising,and more spending on imports
-new jobs may be low pay
-more factories-> environmental issues

Question 4

what happens when the current account is very negative

Answer 4

-cut imports by reducing domestic consumption and investment -> unemployment increasing as AD decreases

Question 5

what happens when the fiscal deficit is too high

Answer 5

cut in gov spending, and raise in taxes
->unemployment, and short term economic growth decreases
-> recession

Question 6

what happens when there are inequalities in income and wealth

Answer 6

-gov redistribute income via taxes and gov spending
-> disincentive effect to work ->unemployment

Question 7

what happens when the environmental situation is deteriorating

Answer 7

-policies
-investing into cleaner tech diverts investment -> lower growth