2.6.4 Conflicts and Trade-Offs Between Objectives and Policies

Question 1

what is the conflict between low unemployment and low inflation

Answer 1

• short-run Philips curve (CP inflation)
• more households earning disposable incomes, increased consumption, AD and DP inflation

Question 2

what is the conflict between long-term growth and low inflation

Answer 2

Keynesian:
possible negative output gap as low and stable inflation may be achieved by contractionary demand-side policy, so AD shifts inwards whilst LRAS increases

Question 3

what is the conflict between low inflation and improved balance of payments position

Answer 3

• hot money flows (may be higher interest rates, so higher demand for pound and lower net exports)
• when inflation falls, real incomes rise, so demand for incomes rises

Question 4

what is the conflict between short term growth and improved balance of payments position

Answer 4

higher average incomes, greater demand for imports, worsens trade balance