4.2.3.4 - Possible conflicts between macroeconomic policy objectives

What are trade-offs that might occur between economic growth and inflation?

If the economy grows due to increased consumption there could be a positive output gap due to resources being used closer to their full capacity. This may put upwards pressure on inflation.

Why might a trade-off not be made with economic growth and inflation?

If both AD and LRAS shift at the same time and at the same rate then prices will stay the same and inflation may not occur
If there is a large amount of spare capacity in the economy then if AD shifts to the right then price level is unlikely to increase

Why might a trade-off not be made with economic growth and the balance of payments?

If there is export led economic growth then it could lead to a current account surplus

What are trade-offs that might occur between economic growth and the balance of payments?

During high periods of economic growth consumers tend to increase their levels of consumption so MPC imports increases --> worsens the current account deficit.

What are trade-offs that might occur between economic growth and the environment?

Results in more negative externalities such as pollution. Due to increased manufacturing and waste

Trade off between unemployment and inflation

In the short run there is a trade-off using Phillips curve
Economic growth increases unemployment falls due to more jobs being created. Wages increase which could lead to wage price spiral

What is the Philips curve?

Represents the trade-off between unemployment and inflation. Shows that when unemployment decreases inflation increases

What does the long run Phillips curve show?

Uses the natural rate of unemployment and shows there is no trade off between unemployment and inflation