Conflicts and Trade-offs between Objectives & Policies

• What are the 7 macro objectives?

  • Economic growth
  • Low & stable inflation
  • Environmental protection
  • Low unemployment
  • Income equality
  • BOP on the current account
  • Balanced fiscal budget
• What is a conflict between low unemployment & low and stable inflation?

  Low unemployment means more people have higher disposable incomes leading to demand-pull inflation.
• What is a conflict between economic growth & balanced fiscal budget?

  Economic growth may require much higher government expenditure, possibly causing an unbalanced fiscal budget.
• What is a conflict between economic growth & low and stable inflation?

  Inflation comes with economic growth - increased consumption = increased AD = inflation

  Higher animal spirits
• What is a conflict between economic growth & environmental protection?

  More industries mean increased emissions of pollution.
• What is a conflict of economic growth & income equality?

  As the economy grows, it can broaden the income gap depending on where the growth happens.
• What is a conflict between economic growth & balance of payments on the current account?

  As we become richer, we import more.
• What is a conflict between low unemployment & environmental protection?

  By having more workers driving to work, it adds to pollution.
• What is a conflict between income equality & balance of payments the current account?

  Poeple with higher income will import more (mpm).
• What is a conflict between income equality & low and stable inflation?

  Income equality could lead to low and stable inflation.
• What is meant by a policy conflict?

  A policy conflict occurs when two policy objectives cannot be achieved at the same time, policy makers will focus on achieving the policy with the best performance/outcome.
• What is meant by a trade off between policy objectives?

  Although it may be impossible to achieve two desirable objetives at the same time, policy-makers may be able to choose an acceptable combination lying between the extremes.
• What does the Philip‘s Curve show?

  The Philip‘s Curve shows a trade-off between inflation and unemployment. A demand-side policy to reduce unemployment could conflict with price stability.
• What does the Philips Curve suggest?

  As unemployment falls, inflation rises.

  As unemployment rises, inflation falls.
• What does rising demand and falling unemployment lead to?

  Can lead to suppliers raising their prices to increase their profit margins.