There are 3 significant policy conflicts and policy trade offs:
- Full employment/growth and satisfactory balance of payments - strong GDP growth may lead to increased levels of consumer demand which could lead to b.o.p. worsening when marginal propensity to import is high. An improvement in b.o.p. (due to surge in exports for example) may cause demand pull inflation depending on stage of economic cycle and size of the output gap.
- Full employment and control of inflation - during periods of strong GDP growth, fall in unemployment could lead to demand-pull/cost-push inflation (phillips curve). Contractionary policies to reduce AD could lead to reduction in GDP and increase in unemployment. Deflation could also lead to increase in unemployment.
- Above can be resolved if - increase in PPF through higher labour productivity, innovation allows businesses to produce more at lower unit costs, expectations of inflations remain stable
- Economic growth and equal distribution of wealth - free market supply side economists have argued that progressive taxes reduce entrepreneurial and personal incentives in labour market, inhibit growht and make market less competitives.
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