Possible macroeconomic objectives and conflicts

Question 1

What are the main macroeconomic objectives?

Answer 1

• Sustainable and balanced economic growth (% change in real GDP)
• Environmental protection: growth needs to be sustainable
• Price stability: control of cost and price inflation (eg via an inflation
  target)
• High employment rate, low unemployment, reduced inactivity in the
  labour market
• Sustainable overseas trade balance in goods and services/Balance of Payments current account in equilibrium
• More equitable final distribution of income and wealth - greater income
  equality

Question 2

What are examples of trade offs between macroeconomic objectives?

Answer 2

• Faster growth can fuel demand-pull inflation and widen a deficit on the current account; income inequality may rise if the growth is not inclusive
• Low unemployment can increase real wages and cause cost-push inflation
• Polices to reduce inflation can slow growth and cause unemployment
• Reducing government borrowing and the national debt can slow growth and cause living standards to stagnate

Question 3

What is the Phillips Curve and what does it look like?

Answer 3

The Phillips Curve is an economic model that shows the possible inverse nonlinear relationship between the unemployment rate and the rate of inflation

Question 4

Explain the Phillips Curve at A

Answer 4

At A: when unemployment is high, inflationary pressures in an economy tend to be weak; there is lots of spare capacity (negative
output gap) in the economy, so reducing unemployment does not put much upward pressure on wages and prices

Question 5

Explain the Phillips Curve at B

Answer 5

At B: as unemployment falls further, then wage pressures and price
pressures may start to accelerate – the gradient of the curve steepens
If unemployment falls even lower, the risk of a significant increase in
inflation goes up - the output gap is likely to be positive and factor
markets are experiencing shortages

Question 6

What is stagflation?

Answer 6

when both unemployment and inflation are high (a
stagnant economy with inflation)

Question 7

Explain challenges to the Phillips curve

Answer 7

The short run Phillips curve could shift out if expectations of inflation increase, or inwards if expectations of inflation decrease
Some monetarist economists do not believe the inflation-unemployment trade-off exists in the long run (the long-run PC Is vertical), meanwhile Keynes though it was possible to have differing levels of unemployment at the same inflation rate