Macro 10 - Macroeconomic Objectives

Question 1

List the conflicting macroeconomic objectives

Answer 1

1. Economic growth and redistribution
2. Economic growth and inflation
3. Low unemployment and low inflation
4. Strong growth and a balanced budget
5. Strong growth and sustainable growth
6. Low unemployment and high productivity

Question 2

Conflicting macroeconomic objectives - economic growth and redistribution

Answer 2

>As an economy grows, high-skilled workers become more in demand, while demand for low-skilled workers (especially those who can be replaced by machinery falls).
>This means that inequality may increase as the redistribution of economic growth may benefit high-skilled workers more.
>Solutions:
-increase welfare payments
-use progressive taxes
-increase minimum wage in line with the increase in average wage.

Question 3

Conflicting macroeconomic objectives - economic growth and inflation

Answer 3

>A growing economy can cause large increases in demand resulting in a higher tan desirable level of inflation.
>Trying to keep inflation low through higher interest rates may discourage spending, harming economic growth.
>Solution:
-increase economy’s capacity to decrease the effects of inflation.

Question 4

Conflicting macroeconomic objectives - low unemployment and low inflation

Answer 4

>Low unemployment means the economy is operating near its capacity so a rise in AD (which would increase with low unemployment as consumption will rise as people earn more) will cause an increase in inflation.

Question 5

Conflicting macroeconomic objectives - strong growth and a balanced budget

Answer 5

>Increase in AD as business confidence increase investment and households are better off so they can consume more.
>Inflation increases meaning less competitive and so reduce exports worsening a budget deficit.
>Solution:
-increase interest rates.

Question 6

Conflicting macroeconomic objectives - strong growth and sustainable growth

Answer 6

>As an economy grows it may deplete natural resources at a faster rate so future growth will be affected.
>Increased pollution.

Question 7

Conflicting macroeconomic objectives - low unemployment and high productivity

Answer 7

>Law of diminishing returns in short-run.
>As more workers are employed after the point of diminishing returns, productivity falls.
>Increased rate of absenteeism.
>Increased AD = increased inflation = decreased real wages = increased OC.

Question 8

The Phillips Curve

Answer 8

>The Phillips Curve shows the conflict between low unemployment and low inflation.
>As unemployment falls, the economy nears capacity: –so labour becomes more scarce and wages rise, extra cost may be passed onto consumers in the form of higher prices = cost-push inflation.
-decrease in unemployment may also cause households to increase consumption as they feel more confident in long term prospects = demand-pull inflation.
>This inflation could cause further inflation due to the idea of ‘adaptive expectations’.
>However, gov spending decreases as less claim JSA = decrease in AD.
>Monetarists argue that there isn’t a trade-off.

Question 9

Adaptive Expectations

Answer 9

>i.e. people use the past to predict the future.
>The idea means high inflation can become embedded in an economy, even if the government is trying to reduce it as once inflation rises, people expect it to remain high.