Macroeconomic objectives
Conflicting macroeconomic objectives - means that its not possible for the government to achive all of its macroeconomic objectives owning to potential trade offs. Potential conflic bewteen the main macroeconomic objectives:
- low unemployment and low inflation
- high economic growth and low inflation
- high economic growth and environmental sustainability
- high economic growth and equity in income distribution
Low unemployment and low inflation
Low unemployment means that people have extra money to spend as economy reaches the full employment level. That increase the AD and cause demand-pull inflation. Low unemployment cause cost-push inflation, because high employment makes harder for firms to afford high skilled labour with low wages that is why workers demand higher wage which contributes to wage inflation.
That is why it is impossible to achive low unemployment with low inflation rate.
High economic growth and low inflation
Economic growth is usually associated with the increase of the level of AD. AD increase when any components of it is affected (consumption, investment, goverment spending or net exports). Because economy grows there is a risk of increased inflation because of the shift of the AD curve. Esepcially when economy approches its full employment level of national output. If AD rises faster than AS the demand-pull inflation occurs.
Cost push inflation can also occur because economic growth influence full employment level, makes harder for firms to attract high skilled labour because they demand higher wages.
Monetary policy is used to reduced inflation, but it cannot solve inflation and recession at the same time.
Economic growth by definition means that there is a low and stable inflation as AS increase in response of increasing AD, however if inflation rises too quickly it disrupts the achieving of macroeconomic objectives. CONTROLED INFLATION and increase of AS and AD creating economic growth and employment with fall in prices.
High economic growth and environmental sustainability
Economic growth cause increase production that affect consuption that contributes negative externalities (air pollutions, excessive use of fossil fuels) that cause problems to environment. Impact on environment cause damages on the well-being of individuals and society. For example a great amount onfplastic in the river have defastating damage on the natural environment.
Economic growth can be connected with environmental sustainability by using e.g. green energy.
Environmental sustainability is a responsible acttions of individuals and society in order to maintain a scare natural resources and protect planet in order to support the social and economic well-being.
High economic growth and equity in income distribution
Rapid economic growth sometimes create greater disparities in distribution of income, by widening the gap betwen extremely rich and poor people.
Economic growth also leads to greater tax revenues. Efficient implementation of this tax revenues can contribute to redistribute income and wealth in the economy.