2.6.4 Government Trade-offs and Conflicts Flashcards
What does the Phillips curve show?
It shows that the relationship between unemployment and inflation is inversely proportional.
Does low employment have to conflict with inflation?
Not if there is a rise in commodities prices which causes cost push inflation.
What is meant by a trade-off?
A trade-off is where a government have to prioritise one objective as they aren’t able to achieve both at the same time due to conflicting objectives.
Does economic growth have to conflict with environmental or sustainability goals?
It usually does conflict, as in order for economic growth there will be an increase in production which means that there will be more waste and pollution. However if these goods produced are sustainable then they are able to increase output without creating pollution.
Does economic growth have to conflict with current account balance?
If your economic growth is lead by imports then your MPM (marginal propensity to import) will be high which means that the price to import will increase leading to a current account balance. This idea is that as incomes are rising it spurs a greater demand for products abroad. However if your export led like China you will be able to grow without worsening the current account balance; in fact it could lead to a current account surplus.
What other trade-offs might the government have to make in order to achieve their objectives?
The inflation target of 2% might have to be sacrificed in order to achieve their objectives
Give 3 examples of where policy instruments might interfere with each other.
- Decreases in GE on education to correct budget deficit but this has a negative long term effect on employment and economic growth
- Expansionary supply side policy to reduce unemployment but it increases inflationary pressures.
- Subsidising businesses to encourage business investment. But this causes a budget deficit.
What difficulties are there in prioritising which policy to use?
Need to choose which policy achieves as many objectives as possible without conflicting many. This will mean that the government will end up sacrificing some objectives.
How are policy instruments linked indirectly?
By using a policy to decrease unemployment it will link back to inflation which is another objective.
