Possible Macroeconomic objectives & conflicts

Question 1

The main macroeconomic objectives

Answer 1

Objectives are the aims or goals of government policy
* 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
* Improved productivity, international competitiveness
* Sustainable overseas trade balance in goods and services/Balance of
Payments current account in equilibrium
* Improved public services, sustainable government finances(both
borrowing and debt)
* More equitable final distribution of income and wealth - greater income
equality
* Improved national well-being/higher standard of living
The government can also set other goals such as net zero, targets for
reducing child poverty, new house building etc
Objectives can change over time depending on the economic (& political)
context

Question 2

Macroeconomic conflicts or trade-offs

Answer 2

It can be difficult for all macroeconomic objectives to be met at the same time –
there are trade-offs, improving one may worsen another. For example:
* 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

Phillips curve

Answer 3

The Phillips Curve is an
economic model that shows

the possible inverse non-
linear relationship between

the unemployment
rate and the rate of inflation

Question 4

Explaining the Phillips curve:

Trade-off between inflation and unemployment

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
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 5

Macroeconomic conflicts or trade-offs

Answer 5

It can be difficult for all macroeconomic objectives to be met at the same time –
there are trade-offs, improving one may worsen another. For example:
* 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 6

Challenges to the Phillips curve

Answer 6

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