Conflicts between macroeconomic policy objectives

Question 1

examples of policy conflicts:

Answer 1

• internal policy: full employment and growth, external policy of satisfactory balance of payments
• low unemployment and controlling inflation
• increasing rate of economic growth and more equal distribution of income and wealth
• higher living standards now and in the future

Question 2

what happens if there is rapid economic growth?

Answer 2

more likely that inflationary pressures will increase. infaltion more likely to occur when growth is above long run trend rate and AD increase faster than AS

Question 3

when economy is growing very quickly, firms have difficulty employing skilled labour which can lead to what?

Answer 3

wage inflation and higher wages cause higher prices

Question 4

persistently high inflation rate can effect what?

Answer 4

negative effects on trade balance, profit of firms and jobs and ultimately economic growth

Question 5

attempts to control inflation by higher interest rates may cause what?

Answer 5

the exchange rate to appreciate and this can reduce price competitiveness of exporting industries and damage economic growth

Question 6

is it possible to have economic growth without causing inflation?

Answer 6

yes if growth is sustainable- if it is close to the long run trend rate, then LRAS will increase at the same rate as AD

Question 7

when economic growth is led by consumer spending it tends to cause what?

Answer 7

tends to cause a deficit in the current account

Question 8

when real incomes are rising at a rapid rate, consumers tend to buy what?

Answer 8

more imports leading to worsening of the trade balance

Question 9

fast growing countries may suffer from high inflation which worsens what?

Answer 9

the competitiveness of domestic industries including exporters. businesses will need to import extra raw materials, components and capital equipment to help expand production

Question 10

if economic growth is export led then there can be an increase in what without causing what

Answer 10

an increase in economic growth without causing a current account deficit

Question 11

describe budget deficits in boom recession and conflict:

Answer 11

boom: decrease government benefits spending, increased tax revenue, decrease deficit
recession: higher deficit
conflict: decreased deficit-> lower gov spending or higher tax revenue -> lower AD which leads to lower economic growth

Question 12

as the rate of unemployment falls, labour shortages may cause an?

Answer 12

increase in wage inflstion and higher unit labour costs

Question 13

when an economy is booming, so does the derived demand for and prices of components and raw materials what does this lead to?

Answer 13

higher costs

Question 14

rising demand and falling unemployment can lead to what?

Answer 14

suppliers raising their prices to increase their profit margins

Question 15

how can you reduce both inflation and unemployment?

Answer 15

• successful supply-side policies are used, can reduce structural unemployment without causing wage inflation
• expectation of inflation remains stable so firms dont face an acceleration in wage demands
• economy is flexible enough to cope with external demand and supply-side shocks

Question 16

other conflicts:

Answer 16

• policies designed to meet environmental goals might damage the competitiveness of domestic businesses in international markets
• measures to reduce inequality such as higher top rate income taxed or increased VAT on luxury products
• effects of changes in interest rates on the distribution of income
• expansionary fiscal policies involving higher government borrowing that have the effect of driving inflation and IR higher

Question 17

external shocks can help relieve conflicts or make them worse. what do free-market economists believe?

Answer 17

that sucessful supply-side policies, combined with supply-side reform in the private sector, facilitate the production of high-quality goods and services

Question 18

what is crowding out?

Answer 18

public sector borrowing to compensate for market failures and provide public and merit goods, might drive up long term interest rates and crowd out private sector investment

Question 19

keynesian approach to reconciling conflicts:

Answer 19

• no crowding out
• multiplier effect is highly significant
• reducing unemployment more important than controlling inflation
• LRAS can be horizontal
• generally advocate fiscal policy
• government should borrow more during recession and run budget deficit
• wages can be sticky causing unemployment

Question 20

monetarists approach to reconciling conflicts:

Answer 20

• gov spending crowds out private sector investment
• control of money supply is crucial in keeping inflation low
• more important to keep inflation low than control unemployment
• LRAS curve is very steep in nature
• generally advocate monetary policy
• government should seek to balance the budget
• wages are flexible in absence of minimum wages or trade