Conflicts between macroeconomic policy objectives

Question 1

Explain how economic growth and inflation can be conflicting policies?

Answer 1

• if there is rapid economic growth, it is likely to cause inflationary pressure becuase firms have dificulty employing sufficient skilled labour, can lead to wage inflation and higher wages cause higher prices.

Question 2

Evalutation of economic growth vs inflation?

Answer 2

• it is possible to have growth without inflation. If growth is sustainable (close to long run growth trend), LRAS will increase at same rate of AD so no inflation

Question 3

Explain how economic growth and balance of payments are conflicting objectives?

Answer 3

Economic growth is led by consumer spending it tends to cause a deficit in current account.

• • real incomes rising at a rapid rate consumers will tend to buy more imports (causes worsening of trade balance)
• fast growing countires may suffer from high inflation which worsens the competitiveness of domestic industries

Question 4

Evaluation of economic growth vs balance of payments?

Answer 4

• impact depends on income elasticity of demand for internationally traded goods and services
• if econ growth is export led, there can be an increase in econ growth without causing current account deficit

Question 5

Explain conflcit between economic growth and budget deficit?

Answer 5

• gov may want to reduce budget deficit, requires higher taxes and lower spending
• if gov wants to boost econ growth, pursue expansionary fiscal policy (tax cuts/ spending rises). could increase aggregate demand and help econ growth , cause budget deficit to rise

Question 6

Evalutation of economic growth vs budget deficit?

Answer 6

• if policies to reduce budget deficit lead to unemployment and lower growth, gov will need to pay more on benefits and will get lower tax. a deficit may only experiance a small reduciton .
• depends on how you reduce budget deficit.

Question 7

Describe conflict between unemployment and inflation?

Answer 7

• in period of high growth, more jobs created, unemployment falls. If unemployment falls it puts upward pressure on wages, leading to inflation

Question 8

In what ways can you reduce inflation and unemployment?

Answer 8

• successful supply side policies are used, can reduce structural unemployment without causing wage inflation.
• expectation of inflation remains stable so firms dont face ab ecceleration in wage demands
• the economy is flexible enough to cope with external demand and supply side shocks such as unexpected volatile in the prices of raw materials and conponents