2.6.4 Conflicts and trade off between objectives and polices

What are the 4 key macro economic objectives

• High and sustainable economic growth (2.5%)

• Low unemployment (5% or lower)

• Low inflation (2%)

• Balanced current account

How do low inflation and economic growth clash

Increase in AD especially if driven by consumption lead to demand pull inflation. Steps to reduce inflation like increasing interest rates decrease C and reduce the overall economic growth

Why might low inflation and economic growth not clash

While demand side led growth does come with inflation supply side improvements increase the LRAS which will achieve economic growth and decrease inflation. Any improvements to Q² of CELL will increase output and decrease inflation

How do low inflation and low unemployment clash

Falling unemployment leads to higher inflation as more people are earning and so consumption increases leading to a rise in AD and demand pull inflation. As unemployment falls there is are less available workers this strengthens the bargaining position of existing workers allowing them to get higher wages but this increase business cost leading to cost push inflation

Why might low inflation and low unemployment not clash

Supply side improvements can create jobs and simultaneously lower the cost of production

There are lots of real world examples of both falling together

It depends on whether jobs are being created through increases in jobs from AD or AS

How do economic growth and balanced current account clash

If economic growth is based on consumption it is likely to worsen the current account as a proportion of that extra consumption will be on spent on imports. If this economic growth pushes the economy closer to capacity then inflation will increase and so the UK’s exports will be less competitive further worsening the current account

Why might economic growth and a balanced current account not clash

If the growth is achieved through the export part of the AD equation then with can be achieved simultaneously as AD is rising and the current account

finish these