conflicts between objectives

Question 1

what are the 7 macro objective?

Answer 1

1. inflation rate of 2% ± 1%
2. economic growth
3. full emplument
4. current account balance equilibrium
5. balanced budget deficit
6. reduce income inequality
7. enviromental sustainability

Question 2

conflict between economic growth and the enviroment (chains of analsysis)

Answer 2

• (expansionary fiscal policy) reduction in taxes–> increase in disposable income–> increase in consumption. increased consumption in goods/ services that require energy, increased amount of co2 emmited into the atmosphere
• (increased infrastructure spendning) heavy industry burns lots of fossil fuel, releasing CO2 into the atmosphere, more global warming

Question 3

conflict between economic growth and enviromental sustainabiity (evaluation)

Answer 3

does not conflict
* economci growth enables companies to make profit. incentivising humans to make innovations to cut carbon dioxide emmisions so that they can continue to make this profit
* economic growthleads to structural changes: changes economies frm manufacturing to services, do not require the use of heavy fossil fuels, less co2. Service based economies are alot more enviromentally sustainable (india and the UK)

Question 4

what are some ways the government try to achieve full employment?

Answer 4

• (demand side) expansionary fiscal policy, increased consumption and investment–> more demand for labour
• (supply side ) creation of jobs

Question 5

conflict between full employment and budget deficit

Answer 5

• epansionary fiscal polciyand government spending on large infrastructure projects will increase the budget deficit, must sell government bonds, increase in government debts

Question 6

conflict between full emplyment and budget deficit (evaluation)

Answer 6

• (long run) at full employment less people claiming benefits, less government spendning
• (long run) more income and corporation tax, more tax revenue

Question 7

conflict between unemployment and inflation

Answer 7

• when unemployment is lower, firms have to fight over the few remaining unemployed people if they want to hire someone new. This means that the remaining unemployed people have lots of bargaining power which can be used to increase wages
• increase in costs of production, SRAS shifts to the right
• increase in prices, increase in price level (inflation)

Question 8

what is the phillips curve ?

Answer 8

shows the trade off between inflation and unemployment

Question 9

phillips curve evaluation (conflict between unemployment and inflation)

Answer 9

However, some economists argue that the philips curve has flattened in the recent years. This is becuase of adaptive expectations, in 1988 the UK established an independant central bank to control inflation. Since then inflation has remained low an steady - mostly between 0 & 3%.
Consumers and producers expect inflation to be low, beacuse it has been for so long. So as everyone plans for it be low, it stays low

Question 10

which objectives conflict with economic growth?

Answer 10

1. higher inflation
2. increasing inequality
3. widening current account deficit
4. full employment
5. enviromental sustainability

Question 11

what is the conflict between supply side polcies and fiscal polcies ?

Answer 11

in order to fund spply side policies, contractionary fiscal policy is required
* in the short term, higher taxes and less spending, decrease in consumption and AD, reducing economic growth

Question 12

what is the conflict between monetary and fiscal policy?

Answer 12

expansionary fiscal policy leads to inflation which then requires contractionary monetary policy, working against. Monetary policy holds back economic growth limiting the effectivness of fiscal policy in boosting economic growth

Question 13

what has been the result on the economy from the 2008 response?

Answer 13

(high debt and low intrest rates )
leading to policy paralysis : cannot implement any other polciies if a similar thing happens in the future

Question 14

Explain the conflict between supply side and fiscal polcies:

Answer 14

The aim of supply-side policies is to boost economic growth. One example of a policy that aims to do that is the construction of the UK’s HS2 rail link. However, projects such as this are expensive. For instance, HS2 was estimated to cost between $£50 - £80$ billion, and is likely to exceed that estimate. In order to pay for these projects, governments have to raise money through contractionary fiscal policy. So, taxes rise and government spending in other areas falls. This means that AD (C + I + G + (X-M) ) will not shift outwards as consumption in the economy will not grow rapidly in the short term. So, there is a clear policy conflict where fiscal policy prevents supply-side policy from achieving its aims in the short term.

Question 15

Explain how the use of intervetionst supply side policies may constrain Aggregate supply

Question 16

Why do some economists arge that adaptive expecations have caused the UK’s phillips curve to flatten?

Answer 16

• However, some economists argue that the Philips curve has flattened
• For example, in 2019 despite the low unemployment rate of 3.9%, the inflation rate was also at a low 1.8%
• This is because of adaptive expectations caused by the establishment of an independant central bank in 1998 which keeps inflation low and stable (between 0-3%)
• Since consumers an producers expect and plan for inflation to be low, it remains low
• consequently, adaptive expectations shows how the historic conflict between full employment and low inflation is less relevent today.

Question 17

conflict between economic growth and balance of payments

Answer 17

• economic growth means more jobs and more income
• more imports demanded as UK has a high Marginal Propensity to import
• worsening balance of paymnets account

eval: economic growth may be export led

Question 18

conflict between economic growth and inflation

Answer 18

economic growth, more income, more consumption, demand pull inflation

eval: full capaity on LRAS

Question 19

conflict between inflation and unemploymnet

Answer 19

more inflation, higher prices of raw materials, increase in cost of production, firms sell less, have to downsize and layoff workers