2.6.4 Conflicts and trade-offs between objectives+policies

• Key Macroeconomic Objectives

  Economic Growth: Increase in the production of goods and services in an economy over time.

  
  

  Low Unemployment: Keeping the unemployment rate at a low level, ensuring that those willing and able to work can find jobs.
• Key Macroeconomic Objectives - 2

  Price Stability: Maintaining a low and stable rate of inflation.

  
  

  Balanced Balance of Payments: Ensuring that the total value of exports equals the total value of imports over a period.
• Potential Conflicts and Trade-offs

  Economic Growth vs. Price Stability:

  Rapid economic growth can lead to inflationary pressures as demand outstrips supply. - Phillips Curve showing trade-off between unemployment and inflation.

  
  

  Low Unemployment vs. Price Stability:

  Policies to reduce unemployment, such as lowering interest rates, can increase inflation.
• Potential Conflicts and Trade-offs - 2

  Economic Growth vs. Environmental Sustainability: Pursuing high growth can lead to environmental degradation.

  
  

  Economic Growth vs. Balanced Balance of Payments: High growth can lead to increased imports, causing trade deficits.
• Potential Conflicts and Trade-offs - 3

  Unemployment vs. Balanced Budget:

  Reducing unemployment may require government spending, leading to budget deficits.
• Policy Conflicts and Trade-offs - 1

  Raising interest rates (contractionary monetary policy) eases demand-side inflationary pressure but raises the cost of borrowing for firms and slows down supply-side investment

  
  

  Tackling short-term inflation delays long-term supply-side growth
• Policy Conflicts and Trade-offs - 2

  An increase in government spending (expansionary fiscal policy) can bring about improvements on the supply-side of the economy in the long-run (LRAS)

  
  

  Conversely, it may cause a shortage in short-run aggregate supply (SRAS) as government spending causes excess demand in the economy, leading to inflation
• Policy Conflicts and Trade-offs - 3

  Increased environmental policies may lead to a fall in economic growth and lower LRAS

  
  

  Fossil fuel industries have traditionally enabled increases in LRAS