Macro 10

Question 1

List the conflicting macroeconomic objectives

Answer 1

1. Economic growth and redistribution
2. Economic growth and inflation
3. Low unemployment and low inflation
4. Strong growth and a balanced budget
5. Strong growth and sustainable growth
6. Low unemployment and high productivity

Question 2

Conflicting macroeconomic objectives - economic growth and redistribution

Answer 2

> As an economy grows, high-skilled workers become more in demand, while demand for low-skilled workers (especially those who can be replaced by machinery falls).
This means that inequality may increase as the redistribution of economic growth may benefit high-skilled workers more.
Solutions:
-increase welfare payments
-use progressive taxes
-increase minimum wage in line with the increase in average wage.

Question 3

Conflicting macroeconomic objectives - economic growth and inflation

Answer 3

> A growing economy can cause large increases in demand resulting in a higher tan desirable level of inflation.
Trying to keep inflation low through higher interest rates may discourage spending, harming economic growth.
Solution:
-increase economy’s capacity to decrease the effects of inflation.

Question 4

Conflicting macroeconomic objectives - low unemployment and low inflation

Answer 4

> Low unemployment means the economy is operating near its capacity so a rise in AD (which would increase with low unemployment as consumption will rise as people earn more) will cause an increase in inflation.

Question 5

Conflicting macroeconomic objectives - strong growth and a balanced budget

Answer 5

> Increase in AD as business confidence increase investment and households are better off so they can consume more.
Inflation increases meaning less competitive and so reduce exports worsening a budget deficit.
Solution:
-increase interest rates.

Question 6

Conflicting macroeconomic objectives - strong growth and sustainable growth

Answer 6

> As an economy grows it may deplete natural resources at a faster rate so future growth will be affected.
Increased pollution.

Question 7

Conflicting macroeconomic objectives - low unemployment and high productivity

Answer 7

> Law of diminishing returns in short-run.
As more workers are employed after the point of diminishing returns, productivity falls.
Increased rate of absenteeism.
Increased AD = increased inflation = decreased real wages = increased OC.

Question 8

The Phillips Curve

Answer 8

> The Phillips Curve shows the conflict between low unemployment and low inflation.
As unemployment falls, the economy nears capacity: –so labour becomes more scarce and wages rise, extra cost may be passed onto consumers in the form of higher prices = cost-push inflation.
-decrease in unemployment may also cause households to increase consumption as they feel more confident in long term prospects = demand-pull inflation.
This inflation could cause further inflation due to the idea of ‘adaptive expectations’.
However, gov spending decreases as less claim JSA = decrease in AD.
Monetarists argue that there isn’t a trade-off.

Question 9

Adaptive Expectations

Answer 9

> i.e. people use the past to predict the future.
The idea means high inflation can become embedded in an economy, even if the government is trying to reduce it as once inflation rises, people expect it to remain high.