Conflicts and Trade-Offs

Question 1

Macroeconomic Conflict

Answer 1

When a macroeconomic objectives conflicts with another.

Question 2

Example of conflicts between macroeconomic objectives

Answer 2

Inflation is too high - One way to reduce inflation is to reduce aggregate demand for example by cutting consumer spending or government spending. However reducing AD is likely to lead to a recession and cyclical unemployment.

Growth is too low - One way to increase it in the short term is to raise AD, this will lower unemployment but will increase inflation. It will also likely increase imports due to goods abroad being cheaper then local goods, leading to a trade deficit.

Question 3

Phillips Curve

Answer 3

The short run phillips curve shows there is a trade-off between high unemployment levels of change of money wages, a proxy measure of inflation.

https://www.economicshelp.org/wp-content/uploads/2013/02/phillips-curve.png