2.6.4 - Conflicts between objectives and policies

• Economic growth vs inflation:

  A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increases faster than AS.
• Economic growth vs the current account:

  • During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit.
  • However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.
• Economic growth vs the government budget deficit:

  • Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth
• Unemployment vs inflation:

  • In the short run, there is a trade-off between the level of unemployment and the inflation rate. This is illustrated with a Phillips curve.