Macro - Conflicts & Trade-offs Between Objectives And Policies

Question 1

Economic growth and the current account of the balance of payments

Answer 1

In periods of high economic growth, incomes usually rise as National output = National expenditure = National income. As consumer’s disposable income rises, the demand for goods/services is also likely to rise as consumers increase their spending. However, some of the goods/services that domestic consumers demand are from overseas. Therefore, if the demand for goods/services increases, the demand for imports is also likely to increase. As a result of this, the expenditure on imports will increase, leading to an increase in the deficit in the current account of the balance of payments.

Question 2

What are the conflicts between Economic growth and the environment

Answer 2

Some countries may experience high rates of economic growth driven by industries that are dependent on unsustainable resources, or those that produce high levels of pollution. This can result in the depletion of scarce resources. Furthermore, with increased output firms are likely to emit increased amounts of pollution. As a result of this, there will be an increase in pollution levels which cause negative externalities.

Question 3

What are the conflicts between Economic growth and inequality

Answer 3

During times of high rates of economic growth, income inequality can often increase. This is because only workers within the industries that are producing this economic growth may experience the benefits of this. On the other hand, those in industries which aren’t contributing as much to the high economic growth rate are likely to miss out on the benefits accrued. Therefore, income inequality will increase.

Question 4

What are the conflicts between Economic growth and inflation

Answer 4

An increase in economic growth moves the economy closer towards the full capacity level of output. This causes an increase in the pressure on existing factors of production, pushing up the price level of goods/services within the economy. The increase in the price level could cause high levels of inflation (e.g. 8%), which goes against the macroeconomic objective of low and stable inflation.

Question 5

What are the conflicts between Economic growth and budget deficit

Answer 5

In order to achieve economic growth, some governments may implement an expansionary fiscal policy. This would require a reduction in taxation and an increase in government spending. However, in order to do this it may mean sacrificing the macroeconomic objective of achieving a budget surplus/reducing the budget deficit. This is because expansionary fiscal policy is likely to result in a decrease in government revenue from taxation and an increase in government expenditure.

Question 6

What does the Short-run Phillips curve show

Answer 6

The Phillips curve shows the trade-off between inflation and employment. As unemployment decreases, inflation increases and as unemployment increases, inflation decreases. Therefore, it may be difficult for governments to achieve both the macroeconomic objectives of low and stable inflation as well as low unemployment.