Conflicts and trade- offs between objectives and policies — Edexcel A-Level Economics A
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Conflicts and trade- offs between objectives and policies explained
Macroeconomic objectives include low and stable inflation, low unemployment, economic growth, a satisfactory balance of payments and, in some frameworks, a balanced budget or environmental sustainability.
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Conflicts arise when improving one objective worsens another. For example, expansionary demand-side policy may reduce unemployment and raise growth but increase inflation and worsen the current account. Reducing inflation through contractionary policy may raise unemployment and slow growth. Faster growth may raise imports and worsen the trade balance. A trade-off means accepting less of one objective to gain more of another; the short-run Phillips curve illustrates the inflation-unemployment trade-off. The extent of conflict depends on the state of the economy, the time horizon and the credibility of policy.
Your focus
- Identify at least two potential conflicts between macroeconomic objectives and explain the causal link.
- Explain how the state of the economy, such as spare capacity or full capacity, affects the severity of a trade-off.
- Distinguish between a short-run trade-off and a long-run relationship between macroeconomic objectives.
Conflicts and trade- offs between objectives and policies exam tips
Marking Points
- A conflict occurs when a policy that improves one macroeconomic objective causes another objective to worsen, for example expansionary policy reducing unemployment but raising inflation.
- The short-run Phillips curve shows a trade-off between inflation and unemployment, so policymakers may choose a point on the curve rather than achieve both objectives at once.
- Growth and the balance of payments can conflict because faster growth raises household income and import spending, worsening the current account.
- Inflation and growth can conflict when the economy is near full capacity, because further demand growth mainly raises prices rather than output.
- Trade-offs are not fixed: in a deep recession with spare capacity, expansionary policy may raise growth and lower unemployment with little initial inflation.
- Evaluation should consider the time horizon, the output gap, supply-side effects and whether policy credibility affects inflation expectations.
Examiner Tips
- 💡For multiple-choice questions, identify which objective is being improved and which is being worsened by the stated policy.
- 💡Eliminate options that describe a complementary relationship, such as lower inflation and lower unemployment always occurring together in the short run.
- 💡Use the phrase 'trade-off' only when one objective is sacrificed for another, not when two objectives improve simultaneously.
Common Mistakes
- Misunderstanding: assuming macroeconomic objectives never conflict. Correction: conflicts are common, especially in the short run when the economy is near full capacity.
- Misunderstanding: treating the Phillips curve as a permanent stable relationship. Correction: the short-run trade-off can shift with expectations and supply shocks, so it is not a fixed menu.
- Misunderstanding: confusing a conflict with a policy failure. Correction: a trade-off means one objective is sacrificed for another; it does not mean the policy was necessarily wrong.
- Misunderstanding: ignoring the state of the economy. Correction: the same policy can have different trade-offs depending on whether there is spare capacity or the economy is overheating.