Economic Trade offs

Readers Question Q) evaluate the view that ‘trade-offs will be required over the period of the cycle’?

In the economic cycle there are often trade offs between different macroeconomic objectives.

The main macroeconomic objectives include:

• Low inflation
• Higher economic growth
• Low unemployment
• Low curent account deficit
• Low government borrowing
• Stable exchange rate.

For example, if the government attempts to increase AD by implementing expansionary fiscal policy, we will get an increase in real GDP and therefore lower unemployment but at a cost of higher inflation.

Diagram Economic Growth

This is an example of a trade off between economic growth + unemployment vs Inflation.

The trade off can be shown in a Phillips curve

However, not all economists believe there is a trade off. Monetarists believe LRAS is inelastic therefore in the long term there is no trade off.

Also, through supply side policies you can reduce unemployment and increase economic growth without causing inflation.

In the current climate, lower interest rates are trying to increase economic growth. However, the downturn is so severe they are not causing inflation, but, at moment are not causing economic growth.

Quatitative easing may be used to print money as an emergency means to avoid deflation and avoid economic downturn, but, it will cause some degree of inflation

Monetarist view of Phillips Curve

Trade offs between Unemployment and inflation