LS14 - Conflicts And Trade-offs Betweent Macroeconomic Objectives

Question 1

Policies to increase growth (SR)

Answer 1

Short run growth:

IF ECONOMY HAS LOW AD OR IN RECESSION- need increase short run growth via increase AD.

Policies: expansionary fiscal/monetary policy.

Question 2

Evaluate policies to increase SR growth

Answer 2

Conflict of objectives- higher economic growth which may bring down unemployment however it may increase demand pull inflation which means inflation overshoots inflation target. Depends on size of output gap. INCOMES RISING MORE SPENDING ON IMPORTS WHICH WIDENING OUR CURRENT ACCOUNT DEFICIT.

Consumer and business confidence- limits effectiveness

Time lags

Question 3

Policies to increase LR growth

Answer 3

SUPPLY SIDE POLICIES. EVALUATION OF SUPPLY SIDE POLICIES

Question 4

What happens when policy makers use expansionary fiscal policy to improve economic growth?

Answer 4

ECONOMIC GROWTH CONFLICTS WITH:

INFLATION RATE OF 2 PERCENT: WHY BECAUSE ECONOMIC GROWTH MEANS Lower taxes, greater disposable income, increased consumption

Additional multiplier effects. More consumption, more revenue for business owners, more employment, consumption increases. Shown by graph as AD increases. Increases real gdp.

HOWEVER, THESE SHIFTS ALSO LEAD TO A SUSTANED INCREASE IN GENERAL PRICE LEVEL, WHICH LEADS TO INCREASED INFLATION MEANING MACROECONOMC OBJECTIVE OF 2 PERCENT IS NOT MET.

ALSO, REDUCED INEQUALITY:

Lower taxes, government gets less money in tax revenue, less money to spend on benefits, less cash on public services. TAX CUTS MEAN RICHER PEOPLE HAVE HIGHER INCOMES MEANING GAP BETWEEN RICH AND POOR WIDEN.

INCREASED GROWTH CAN ALSO CONFLICT OBJECTIVE OF A CURRENT ACCOUNT EQUILBRIUM.

Growing economy attracts foreign investment, rise in demand for currency, increase strength of pound, foreign goods become cheaper for domestic customers. domestic goods become more expensive to foreign customers. Increase in imports, decrease in exports and creation of current account deficit.

Question 5

Conflicts between economic growth and environmental sustainability

Answer 5

The government can increase economic growth through expansionary fiscal policy however this leads to a conflict with environmental sustainability.

Reducing taxes means people wealthier so consume more goods and services so buy and drive more cars, travel abroad on jumbo jets and may eat more meat. These activities require more energy meaning burning of fossil fuels meaning releasing carbon dioxide into the atmosphere meaning climate change and global warming.

SUPPLY SIDE POLICIES:

New rail line ( infrastructure projects) REQUIRES HEAVY INDUSTRY

HEAVY INDUSTRY BURNS HUGE AMOUNTS OF FOSSIL FUELS, RELEASING CARBON DIOXIDE, CONTRIBUTING TO CLIMATE CHANGE.

Question 6

Evaluate conflict between economic growth and environmental sustainability

Answer 6

1. Economists argue it doesnt conflict because they argue economic growth enables companies to make profits this incentive eocnurages innovations that enable humans to reduce carbon dioxide emissions
2. Economic growth helps an economy move from being a manufacturing to a service economy. This change means that the economy will be more environmentally sustainable .

Question 7

Conflicts between budget equilibrium and unemployment

Answer 7

How to achieve full employment: Expansionary fiscal policy

Lower taxes, higher spending, higher consumption, increases AD. SHOWN ON GRAPH. Then means increased in derived demand for labour.

Supply side policies:

Hs2 rail-link which creates lots of jobs. ( 30,000 jobs)

HOWEVER:

Increased government spending and lower taxes leads to a budget deficit . So, governments need to borrow by selling government bonds. And, this will lead to an accumulation or increase of government debt. CONFLICT BETWEEN ECONOMIC GROWTH AND KEEPING A BALANCED BUDGET

Evaluate economic growth and balanced budget:

Short run vs long run- short run yes there will be increase in budget deficit but long run this deficit will close. This is because with full employment the government spends less on unemployment benefits so less government spending. Low unemployment means more tax revenues. As economic growth there is increased consumption. Increased consumption means bigger tax revenues through VAT and corporation tax.

Question 8

Conflicts between unemployment and inflation

Answer 8

When unemployment is lower, firms have to fight over the few remaining unemployed people if they want to hire someone new. This means that the remaining unemployed people have lots of bargaining power which can be used to increase wages. With higher wages, firms will increase their prices , so that they can still make a profit despite the higher wage costs.

HIGHER WAGES PUSH UP COSST WHICH MEANS FIRM PUSHES UP PRICES WHICH INCREASES PRICE LEVEL WHICH IS INFLATION. LOWER UNEMPLOYMENT CAN LEAD TO HIGH INFLATION.

Question 9

What does a Phillips curve show

Answer 9

The Phillips Curve shows the trade off between inflation and unemployment.