Conflicts between macroeconomic objectives

• what are the macroeconomic objectives?


  1) Inflation rate of 2% +/- 1%

  2) Sustained economic growth

  3) Full employment

  4) A current account equilibrium

  5) A balanced budget

  6) Reduced inequality

  7) Environmental sustainability
• what tools can the government use to reach the macroeconomic objectives?


  1) Fiscal Policies

  2) Monetary policies

  3) Supply-side policies
• what are examples of some conflicts?


  1) Growth and the environment

  2) Growth and higher inflation

  3) Growth and a widening current account deficit

  4) Growth and increasing inequality

  5) Budget equilibrium and unemployment

  6) Inflation and unemployment
• Evaluate conflicts between growth and the environment


  1) Only the free market will provide solutions to climate change as companies are incentivised by profits and it is easier for firms to make profits in a growing economy. Use of non-renewable resources mean that in the LR, companies (e.g. construction and energy) will experience deceased profits as resources start depleting so they are incentivised to pursue renewable energy sources so they can continue to make profits - means the economy keeps growing and consumers can continue with their current lifestyles

  
  

  2) Some economists argue that when economies grow, they change. As developing countries grow, jobs will move from manufacturing which require burning of fossil fuels to services which don't require fossil fuels at all. This means a reduction in CO2 emissions suggesting that a service-based economy such as the UK is far more sustainable than a manufacturing economy such as China
• How are growth and the environment conflicts


  e.g. Expansionary fiscal policy to increase economic growth

  
  

  reduced taxes - increases income and wealth - increases consumption

  
  

  As incomes rise, more people have the money to buy cars, travel abroad, eat more meats etc. however all these activities require energy which increases burning of fossil fuels, increases CO2 in the atmosphere and worsens climate change and global warming

  
  

  Therefore, growing the economy with expansionary fiscal policy means that economic growth will lead to a worsening environment

  Governments can also use supply-side policies to boost the economy to increase output (e.g. the HS2 railway) however such large projects will also worsen the environment as the amount of heavy industry required increases - natural environment is destroyed to make way for railways, diggers, lorries etc.

  
  

  Furthermore, this heavy industry will burn a lot of fossil fuels and further increase CO2 emissions, contributing to climate change and global warming
• Why does full employment conflict with budget equilibrium?


  e.g. can be achieved by expansionary fiscal policy

  
  

  lower taxes and higher spending will lead to increased investment and consumption - shifts AD right and causes an outward shift in derived demand for labour

  
  

  e.g. could also use supply side policies to achieve full employment such as investing in infrastructure (e.g. the new HS2 railway) - creating new jobs as well as reduce geographical immobility of labour.

  
  

  - These will both lead to conflicts as they result in increased government spending and lower taxes which leads to a budget deficit. So governments need to borrow by selling government bonds. This will increase government debt
• Evaluate conflicts between full employment and a balanced budget


  1) In the LR, the budget deficit could fall. As there is full employment, less people will claim unemployment benefits and this will decrease decrease government spending

  
  

  2) A growing economy with low unemployment will yield bigger tax revenues. As employment rises, AD rises and so will profits. This will increase VAT and corporation tax revenue
• SR Phillips curve - unemployment and inflation


  When unemployment is low, firms have to fight over the remaining unemployed people if they want to hire someone new. This means the remaining unemployed people have lots of bargaining power which can be used to increase wages and firms will have little choice but to accept.

  
  

  Higher wages - higher costs - higher prices

  
  

  This means that lower unemployment can lead to higher inflation

  
  

  This relationship can be demonstrate with the Phillips curve, discovered in the 1950s

  
• Evaluation of the Phillips curve


  Some economists argue that the historic relationship between the two objectives no longer exists and the curve has now flattened

  e.g. in 2019 when unemployment was 3.9%, the inflation rate should've been high because in 1975 when unemployment was 3.9, inflation was 24.24% but in 2019 suggesting the curve has flattened.

  This is because the UK now has a central bank since who aim to keep inflation within 2% so consumers expect low prices and producers only increase their prices by a small amount as inflation has been almost stable for 20+ years, this means workers will only ever demand small increases in wages

  This is all known as'adaptive expectations' -more important factor of inflation than employment

  Adaptive expectations question whether there is still a relationship between full employment and inflation

  
• what are conflicts between different economic policies

  1) Supply-side and fiscal

  2) Fiscal and monetary

  3) How the 2008 financial crisis caused a conflict between all policy tools

  
  

  
  

  These conflicts can be used as evaluation for the effectiveness of the policies
• What are the conflicts between supply-side and fiscal policy?


  supply side example - new HS2 railway which will increase economic growth and productivity by shifting AD out in the SR and LRAS out

  
  

  However, development of infrastructure (or any there supply-side policy) will cost the government money

  
  

  e.g. the new HS2 railway will cost over £70bn

  
  

  To increase government funds, they will have to use contractionary fiscal policy and increase taxes - this will decrease disposable incomes and consumption in the economy and shift AD inward - firms will close down - unemployment will rise - limiting economic growth and productivity

  
  

  This means the effectiveness of the supply-side policy in the SR has been limited
• What are the conflicts between fiscal and monetary policies

  e.g. expansionary fiscal policies can be used to increase economic growth and reduce unemployment - increases consumption and AD

  
  

  However, increased AD leads to increased inflation. This means policy makers will now turn to monetary policy to reduce inflation

  
  

  Increased interest rates - decreased consumption - increased savings - increased leakages from the circular flow. Reduces investment and borrowing by firms

  
  

  Therefore:

  1) Fiscal used to boost AD and economic growth

  2) causes inflation

  3) Monetary policy to combat inflation

  4) This prevents economic growth

  5) Defeats the whole purpose of fiscal policy in the first place
• How did the Global Financial Crisis lead to policy paralysis


  Since 2008, governments have used:

  - Supply-side

  - Fiscal

  - Monetary

  to increase economic growth and reduce the impacts of the recession, the effects of these policies are still relevant today

  
  

  e.g. in 2019, UK government debt was 86% of GDP and interest rates were at 0.75%.

  
  

  To prevent another future recession/collapse, there are no tools left for the government and central bank to use as the bank cannot lower interest rates beyond a certain point and government do not want to run budget deficits and end up with more debt

  
  

  If there is another similar crisis in the future, policy makers have no tools left and cannot do anything - there will be policy paralysis