Edexcel A Level Economics A:复习笔记2.6.4 Conflicts & Trade-offs Between Objectives & Policies
Trade-offs Between Macroeconomic Objectives
- Policy decisions by?governments?often create a?trade-off?in the?macroeconomic objectives
- Achieving one objective may come at the cost of?worsening progress in another objective
An Explanation of the Common Trade-offs That Exist Between the Macroeconomic Objectives
| Trade-off | Explanation |
| Economic Growth & Inflation | Increasing economic growth?causes the economy to move closer to?full employment. Prices for remaining resources are bid up leading to inflation which may outpace the?target inflation rate of 2% |
| Economic Growth & Environmental Sustainability | Economic growth often increases pollution,?negative externalities?and the?depletion of non-renewable resources. The higher the growth, the faster the depletion |
| Economic Growth & Inequality | During periods of high economic growth, the profits the owners?of the factors of production receive are?disproportionate?to any increase in?workers' wages leading to greater inequality |
| Economic Growth & Balanced Budget | Economic growth driven by expansionary fiscal policy?often requires a?budget deficit |
| Economic Growth & Balancing the Current Account | Economic growth usually leads to?higher incomes?which leads to an increase in?imports?by households thereby?worsening?the?current account balance |
| Low Unemployment & Low Inflation | The closer an economy moves to full employment?the less workers will be available for hire and?wage inflation?will help increase?overall inflation |
Exam Tip
You are usually examined on trade-offs and conflicts in longer essay questions. In your responses, be more precise than general. For example do not speak about contractionary monetary policy, but focus on a?specific?contractionary monetary policy tool (e.g. increasing interest rates) - and then?logically explain the conflicts?or trade-offs that will develop.
Short-run Phillips Curve
- The?Short-run?Phillips Curve (SRPC)?observes that there may be a?trade-off?between unemployment and inflation
- Rising inflation?is accompanied by?falling unemployment
- Rising unemployment?is accompanied by?falling inflation
- This?trade-off?makes it difficult for the government to achieve both low unemployment and low inflation
The Short-run Phillips Curve illustrates the relationship between changes to aggregate demand (AD), inflation & unemployment
Diagram Analysis
- The economy is initially in equilibrium?at AP1YFE
- At this point,?unemployment?is at 4% and?inflation?is at 3% and this is considered to be?full employment (YFE)
- There is always some unemployment due to the?frictional?and?structural?unemployment that exists
- An?increase in AD?from AD1→AD2?causes a?positive output gap?(YFE-Y2)
- With an increase in output the?demand for labour rises?& unemployment falls from 4%→3%
- The remaining labour in the market is?scarcer?& workers are able to negotiate higher wages
- This causes wage inflation in the economy
- Wage inflation leads to an increase in?inflation?from 3%→4%
- A?decrease in AD?from AD1→AD3?causes a?negative output gap?(YFE-Y3)
- With a decrease in output the?demand for labour falls?& unemployment rises from 4%→5%
- Labour is more abundant & to get hired workers have to?accept lower wages
- This causes?wage deflation?in the economy
- Wage deflation leads to?a decrease in?inflation?from 3%→2%
Policy Conflicts & Trade-offs
- Similarly to the trade-offs that exist in achieving the different?macroeconomic objectives, there are?trade-offs & conflicts?that occur with the use of demand-side & supply-side policies
Example 1
- Raising interest rates?(contractionary monetary policy), eases demand-side inflationary pressure but raises the cost of borrowing for firms and slows down?supply-side investment
- Tackling short term inflation, delays long term?supply-side growth
Example 2
- An increase in government spending?(expansionary fiscal policy)?can bring about improvements on the supply-side of the economy in the?long-run (LRAS)
- Conversely, it may cause a shortage in?short-run aggregate supply (SRAS)?as government spending causes excess demand in the economy, leading to inflation
Example 3
- Increased?environmental policies?may lead to a fall in economic growth and lower LRAS
- Fossil fuel industries have traditionally enabled increases in LRAS
Exam Tip
When assessing?demand-side and supply-side policies, it's important to consider them in totality. Government and central banks will use a?combination of policies?to address economic issues. So, even if the question asks you to evaluate the use of an individual policy (e.g. fiscal policy), you should?include alternative policies?in your answer.
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