Lesson 28 - Policy conflicts

Question 1

Conflicts frequently appear between different macroeconomic objectives, what are the consequences of this?

Answer 1

Different choices have to be made regarding which objectives are given the greatest priority

Question 2

List three conflicting macroeconomic aims?

Answer 2

Unemployment and inflation
Economic growth and inflation
Economic growth and inequality

Question 3

What is the name of the curve that demonstrates the trade off between unemployment and inflation?

Answer 3

The Phillips Curve

Question 4

Why does falling unemployment stimulate inflation?

Answer 4

Labour shortages will cause an increase in wage inflation and higher unit labour costs. Furthermore, rising demand and falling unemployment can lead to suppliers raising their prices in order to increase their profit margins.

Question 5

Economic growth and low inflation are two conflicting macroeconomic objectives, an overheating economy may suffer accelerating inflation, what are the consequences of high inflation?

Answer 5

Negative effects on trade performance, business profits and jobs

Question 6

When is the greatest risk of accelerating inflation?

Answer 6

When the short run aggregate supply is inelastic

Question 7

How can the conflict between growth and inflation be resolved?

Answer 7

The conflict between growth and inflation can be resolved by having effective supply side economic policies

Question 8

It is possible for an economy to suffer high inflation and a slowdown in economic growth, what is this known as?

Answer 8

Stagflation

Question 9

What is the name of the curve that shows what happens to inequality as a country develops?

Answer 9

The Kuznets Curve

Question 10

How do richer countries counteract the problem of inequality?

Answer 10

They increase the rate of taxation for those on high earnings and increase spending on welfare.