Topic 3.5 Possible conflicts between macroeconomic policy objectives

Question 1

Short-run phillips curve

Answer 1

This shows the tradeoff between unemployment and inflation.

The inflation rate is on the y-axis, and unemployment is on the x-axis. The SRPC curve is inverse (like 1/x in the top right).

This is because as AD shifts to the right, the demand for goods/services increases. Labour is a derived demand, so unemployment decreases, firms get more profits, workers get higher income, more people spending so firms increase prices (to also match wage increases)

Question 2

AD right (cause + conflict)

Answer 2

Cause: Expansionary fiscal/monetary policy.
What it does:
- Increase in Growth
- Decrease in Unemployment
- Decrease in income inequality (govt spending, welfare, cuts to regressive tax, etc.)
Conflicts
- Demand-pull inflation
- CA position (^imports)
- Govt Finances (Budget Deficit)
- Environment (with increase in AD, more production thus potentially more pollution)

Question 3

AD left

Answer 3

Cause: Contractionary fiscal/monetary policy.
What it does/Conflicts - opposite to AD right