Policy conflicts [2.6.4]

Question 1

What is the conflict between Unemployment and inflation?

Answer 1

Philips curve shows trade off between inflation and unemployment. Demand side policy to reduce unemployment conflict with price stability.

As rate of unemployment falls, labour shortages may cause an increase in wage inflation and higher cost. Rising demand and falling unemployment leads to suppliers rising their prices to increase profit margins

Question 2

What are the conflicts between Growth and inflation?

Answer 2

An overheating economy, may suffer accelerating inflation then has negative effects on trade performance business and profit.

Risk of accelerating inflation is greatest when short run AS is inelastic
Conflict between growth and inflation can be resolved by having effective supply side economic policies
If an economy suffers high inflation and slowdown in economic growth - Stagflation

Question 3

What are the conflicts between Economic growth and the BOP?

Answer 3

A period of rapid economic growth may come into conflict with a country’s BOP. Much depends on the YED for internationally traded goods and services

When real incomes are rising at rapid rate, consumers tend to buy more imports worsens BOP
Business will also import extra raw materials, components and capital equipment to increase AS.

Question 4

What are the conflicts between Economic growth and inequality?

Answer 4

A period of rapid Economic growth leads to greater inequality between people in a country.

As countries growth a small group of people enjoy the benefits.
Workers are employed on low wages that maximise profits for owners
Richer countries increase tax and spend more on welfare to reduce inequality