Chapter 21-conflicts-between-macroeconomic-goals (1)
-
Upload
muhammad-omer-mirza -
Category
Technology
-
view
487 -
download
0
description
Transcript of Chapter 21-conflicts-between-macroeconomic-goals (1)
Written by: Edmund Quek
© 2011 Economics Cafe All rights reserved. Page 1
CHAPTER 21
CONFLICTS BETWEEN MACROECONOMIC GOALS
LECTURE OUTLINE
1 CONFLICTS
1.1 Conflict between unemployment and inflation
1.2 Conflict between unemployment and the balance of payments
1.3 Conflict between unemployment and economic growth
1.4 Conflict between inflation and economic growth
1.5 Conflict between inflation and unemployment
1.6 Conflict between inflation and the balance of payments
1.7 Conflict between economic growth and inflation
1.8 Conflict between economic growth and the balance of payments
1.9 Conflict between economic growth and unemployment
1.10 Conflict between the balance of payments and economic growth
1.11 Conflict between the balance of payments and unemployment
1.12 Conflict between the balance of payments and inflation
2 NO CONFLICTS
References
John Sloman, Economics
William A. McEachern, Economics
Richard G. Lipsey and K. Alec Chrystal, Positive Economics
G. F. Stanlake and Susan Grant, Introductory Economics
Michael Parkin, Economics
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics
Written by: Edmund Quek
© 2011 Economics Cafe All rights reserved. Page 2
1 CONFLICTS
1.1 Conflict between unemployment and inflation
If the government increases aggregate demand to reduce unemployment, inflation will rise
and this short-run trade-off can be shown by the short-run Phillips curve.
In the above diagram, when the unemployment rate () falls from 0 to 1, the inflation rate
() rises from 0 to 1.
1.2 Conflict between unemployment and the balance of payments
If the government increases aggregate demand to reduce unemployment, the increase in
national income and the general price level will lead to a decrease in net exports. If the
economy initially has a balance of payments equilibrium, the balance of payments will
move into a deficit. Under the fixed exchange rate system, the balance of payments deficit
will be persistent.
1.3 Conflict between unemployment and economic growth
From section 2.2, under the flexible exchange rate system, although the resultant
depreciation of domestic currency will correct the balance of payments deficit, it may
induce people to sell it in anticipation of further falls in the exchange rate which may lead
to currency instability. If this happens, inward foreign direct investments and hence
economic growth will fall.
Written by: Edmund Quek
© 2011 Economics Cafe All rights reserved. Page 3
1.4 Conflict between inflation and economic growth
If the government decreases aggregate demand to reduce inflation, economic growth will
fall.
1.5 Conflict between inflation and unemployment
If the government decreases aggregate demand to reduce inflation, unemployment will rise
and this trade-off can be shown by the short-run Phillips curve.
In the above diagram, when the inflation rate () falls from 0 to 1, the unemployment rate
() rises from 0 to 1.
1.6 Conflict between inflation and the balance of payments
If the government decreases aggregate demand to reduce inflation, the decrease in national
income and the general price level will lead to an increase in net exports. If the economy
initially has a balance of payments equilibrium, the balance of payments will move into a
surplus. Under the fixed exchange rate system, the balance of payments surplus will be
persistent.
1.7 Conflict between economic growth and inflation
If the government increases aggregate demand to increase economic growth, inflation will
rise.
Written by: Edmund Quek
© 2011 Economics Cafe All rights reserved. Page 4
1.8 Conflict between economic growth and the balance of payments
If the government increases aggregate demand to increase economic growth, import
growth will rise. If the economy initially has a balance of payments equilibrium, the
balance of payments will move into a deficit. Under the fixed exchange rate system, the
balance of payments deficit will be persistent.
1.9 Conflict between economic growth and unemployment
If the government increases productivity growth to increase economic growth by
increasing expenditure on research and development, skills and knowledge will become
obsolete at a faster pace which will lead to a rise in structural unemployment.
1.10 Conflict between the balance of payments and economic growth
If the government decreases aggregate demand to correct a persistent balance of payments
deficit, economic growth will fall.
1.11 Conflict between the balance of payments and unemployment
If the government decreases aggregate demand to correct a persistent balance of payments
deficit, unemployment will rise.
1.12 Conflict between the balance of payments and inflation
If the government increases aggregate demand to correct a persistent balance of payments
surplus, inflation will rise.
2 NO CONFLICTS
Although there are potential conflicts among the four macroeconomic goals, achieving
success in one does not always lead to failure in another. For instance, if the government
increases aggregate demand to increase economic growth, demand-deficient
unemployment will fall. Further, if there is initially deflation in the economy, the increase
in aggregate demand may lead to low inflation which is desirable for the economy. In
addition, if the economy initially has a persistent balance of payments surplus, the higher
import growth due to the higher economic growth may correct the surplus.