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Conflicts between objectives
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Governments cannot always achieve every objective at once. A policy that helps one can harm another.
Unemployment and inflation
Boosting demand to cut unemployment can push up inflation.
Raising interest rates to cut inflation can increase unemployment.
Raising interest rates to cut inflation can increase unemployment.
Growth versus inflation and the environment
Fast economic growth can cause demand-pull inflation if demand grows faster than capacity.
Fast growth often means more production, more energy use and more pollution, harming environmental protection.
Fast growth often means more production, more energy use and more pollution, harming environmental protection.
Inflation and the current account
High inflation makes exports less competitive and imports more attractive, which worsens the current account.
But raising interest rates to cut inflation can make the currency appreciate, which also makes exports dearer, so the current account may still suffer.
Supply-side policies can help several objectives at once, but take time.
But raising interest rates to cut inflation can make the currency appreciate, which also makes exports dearer, so the current account may still suffer.
Supply-side policies can help several objectives at once, but take time.
A government cuts taxes to reduce unemployment. Which objective might suffer?
- Lower taxes raise spending and demand.
- If demand outpaces supply, prices rise.
Answer: Low inflation
Trade-offs: unemployment vs inflation, growth vs inflation, growth vs environment, and inflation vs the current account. Policy choices involve weighing these conflicts.
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