Trade-offs between macro objectives

Macro objectives trade-offs

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  • Trade-offs between macro objectives
  • Macro objectives are low inflation, low unemployment, balanced BoP and economic growth also equal dist of income and wealth
    • Trade-offs between macro objectives
  • Economic growth and inflation
    • Inflation and unemployment
      • Phillips curve - inverse r/s between rate of inflation and level or % of Un
    • Economic growth and BoP
      • depends on how growth occurs and of what type it is
        • if surplus financed (in boom surplus built up, theoretically) then ok, recovery can also be paid for with surplus
    • Growth and externalities
      • Growth and dist of income and wealth
        • Growth could mean that incomes of the richer rise whereas other lower incomes stay the same or fall. This increases relative poverty in the country
        • However growth has brought several countries out of poverty e.g. China
          • But China has massive inequalities and strcutural Un
      • Not a theory of inflation but supports Keynesian ones
        • Phillips curve - inverse r/s between rate of inflation and level or % of Un
      • Demand pull: falling Un associated with excess demand which pulls UP money wages causing less labor to be hired.
        • Not a theory of inflation but supports Keynesian ones
        • Cost-push: falling Un means TU power increases so they push for higher wages
          • LRPC shows in LONG RUN these trade-offs aren't possible
            • NRU (equilibrium) always exists
              • LRPC shows in LONG RUN these trade-offs aren't possible
                • Impossible to reduce except at ever-accelerating rate of inflation. This is because Keynesian SRPC ignores expected inflation.
                  • Long run trade-off still exists
              • Impossible to reduce except at ever-accelerating rate of inflation. This is because Keynesian SRPC ignores expected inflation.
                • Long run trade-off still exists
              • High AD can mean more demand-pull inflation if there is no proportionate increase in SRAS
                • Economic growth and inflation
                • In LR this may not happen because nothing is fixed so FoP may increase to cope with increased AD
                  • High AD can mean more demand-pull inflation if there is no proportionate increase in SRAS
                  • Still possible if country lacks supply side management or FoP
                    • In LR this may not happen because nothing is fixed so FoP may increase to cope with increased AD
                    • deficit financed growth could mean sovereign debt problem and trouble in the future (austerity etc)
                      • depends on how growth occurs and of what type it is
                        • if surplus financed (in boom surplus built up, theoretically) then ok, recovery can also be paid for with surplus
                    • In practice most countries do not build up huge surpluses during booms (exception: china)
                      • aggressive growth can harm environment greatly (-ve ext.) in form of pollution or depletion or degradation of resources
                        • Growth and externalities
                        • E.g. overfishing, excessive pollution in cities like Mumbai or Cairo and even view obstruction from buildings
                          • aggressive growth can harm environment greatly (-ve ext.) in form of pollution or depletion or degradation of resources
                          • 'Green' technology as a solution hasn't been very helpful in some areas (hybrid cars too expensive) whereas quite good in others (recycling now common)
                            • Policies: fiscal, monetary, supply-side
                              • Macro objectives are low inflation, low unemployment, balanced BoP and economic growth also equal dist of income and wealth

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