An Explanation of the Common Trade-offs That Exist Between the Macroeconomic Objectives
|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
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.
The Short-run Phillips Curve illustrates the relationship between changes to aggregate demand (AD), inflation & unemployment
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.