This revision note looks at possible conflicts between macroeconomic objectives and some of the policy prescriptions for over-‐coming them. When conflicts arise, choices have to be made about which objectives are given greatest priority.... more
This revision note looks at possible conflicts between macroeconomic objectives and some of the policy prescriptions for over-‐coming them. When conflicts arise, choices have to be made about which objectives are given greatest priority. This is a different issue – for example which ought to be the main objective of macroeconomic policy. These choices will vary from one country to another since the needs of different nations will differ according to their stage of economic development. Here are some possible macro policy conflicts: 1. Inflation and unemployment: a. During a period of strong GDP growth, falling unemployment might create demand-‐ pull and cost-‐push inflation leading to a fall in the real purchasing power of money. b. This trade-‐off is often explained using the Phillips Curve (for A2 students only) c. Policies designed to control demand-‐pull or cost-‐push inflation for example by reducing AD may lead to a contraction of output and a rise in unemployment d. Deflation (negative inflation) may also lead to a rise in unemployment (see later) 2. Economic growth and environmental sustainability: a. Rapid GDP growth and development puts extra pressure on scarce environmental resources threatening the sustainability of living standards for future generations 3. Economic growth and inflation a. An overheating economy may suffer accelerating inflation because of rising demand and an increase in prices of raw materials, energy & unit wage costs b. China and India are two countries where this combination of strong growth and rising inflation has been seen in recent years. In 2010
