Conflicts of macro objectives

Question 1

list macro objectives

Answer 1

• sustainable and strong growth
• low unemployment
• low and stable inflation of 2% goal
• balanced trade
• fair distribution of income
• stability of price, trade, growth etc

Question 2

define a trade off

Answer 2

involves a sacrifice that must be made to get a certain product or experience
= e.g. unemployment vs inflation

Question 3

define phillips curve

Answer 3

• shows trade off between inflation, unemployment and cost push and pull inflation

Question 4

describe phillips curve

Answer 4

• when AD increases due to more exports, incomes etc, real GDP increases= cause inflation to rise
• causes lower unemployment as supply of labour demanded increases
  = eventually workers will demand higher wages which increase CoP for firms
  = causes inward shift of SRAS, causing cost push inflation
  BUT a large decrease inflation doesn’t always lead to high inflation
  = spare capacity being used up can make an effect use of factor resources

Question 5

describe trade off of unemployment and inflation

Answer 5

as unemployment increases, inflation decreases

Question 6

describe a negative output gap

Answer 6

occurs when the actual level of output is less than the
potential level of output
= puts downward pressure on inflation
= means there is unemployment of resources in an economy
= labour and capital aren’t used to full productive potential
= means there is a lot of spare capacity in the economy

Question 7

describe a positive output gap

Answer 7

occurs when the actual level of output is greater than the
potential level of output
= could be due to resources being used beyond the normal
capacity= e.g. if labour works overtime
- If productivity is growing, the output gap becomes positive
= puts upwards pressure on inflation
- China and India, which have high rates of inflation due to fast and increasing demand
= associated with positive output gaps

Question 8

What are the two causes of inflation?

Answer 8

1) Demand pull inflation - AD increases → closer to FE → pressure on existing FoPs making them scarcer (e.g. labour) → firms offer higher wages/input costs → costs of production rise → firms raise prices → demand-pull inflation

2) Cost push - firms respond to rising production costs by increasing prices to protect their profit margins. SRAS inward shift caused by:
- Increased raw material prices
- Increased wages
- Increased business taxes such as vat
- Increased prices of imported raw materials due to a weaker exchange rate

Question 9

trade off from expansionary MP and FP

Answer 9

higher AD and growth TRADE OFFS
- higher inflation shown on SRPC
- worsen CA position due to more demand for imports
- depends on nature of growth
= may come with poor quality jobs= increase inequality
- negative environmental impacts
= more air pollution as more cars on road, more manufacturing= pollution, loss of biodiversity etc
BUT if growth is tech or service dominant, won’t see these large environmental costs or growth might come from renewable energy etc
- depends on size of output gap