Diagram

Main objectives of government macroeconomic policy:

T = Trade
I = Inflation
G = Growth
E = Employment
R = Redistribution of Income
S = Stability

Possible Conflicts that may arise when achieving some of these objectives:

1) Pursuing Economic Growth in Isolation:

● Inflationary Pressure: Focusing solely on economic growth without considering price
stability can lead to inflationary pressure. Excessive demand without corresponding
increases in supply can push prices higher, eroding the purchasing power of
consumers.
Explanation : Inflation refers to a sustained increase in the general price level of goods and
services in an economy over time. It leads to a decline in the purchasing power of money.

There are several potential causes of inflation, one of which is excessive aggregate demand,
without a corresponding increase in aggregate supply. Aggregate demand refers to the total
demand for final goods and services in the economy. Aggregate supply refers to the total
production of goods and services in the economy.

When aggregate demand grows faster than aggregate supply, it creates an economic
environment where too much money is chasing too few goods. Consumers have more
money to spend, but the quantity of goods and services in the economy has not increased
proportionately. This excess of demand over supply leads to producers to increase prices to
balance demand with existing supply.

So if policymakers focus on stimulating economic growth and expanding aggregate demand,

without regard for supply constraints, it can lead to demand-pull inflation. Economic growth
policies like increased government spendings, tax cuts, and expansionary monetary policy
can pump more money into the economy and increase consumer purchasing power. But if
supply does not rise along the demand, the increased spending power will simply drive
prices higher.

The risk is that overstimulating aggregate demand creates an imbalance where demand
outstrips supply. Without controls on inflation, consumers will see the purchasing power of
their money steadily eroded over time as prices are pulled higher by excessive demand
conditions. This is why most central banks aim for modest inflation targets - to allow
economic growth policies but contain rising prices

Possible Diagrams I could use:

● AS-AD model with intermediate goods - Shows inflationary pressures

emerging at earlier stages of the production process before affecting final
goods. Captures cost-push dynamics.

● Expectations-Augmented Phillips Curve - Illustrates how inflation expectations

shape wage and price setting behaviour. Explains the psychology of inflation
.
● Monetary policy reaction function - Visualizes how the central bank raises
interest rates in response to economic overheating and inflation. Useful for
policy analysis.

● Multi-sector macroeconomic model - Uses input-output tables to track spread

of inflation across interconnected sectors. Sophisticated view.

● Dynamic AD-AS model - Uses calculus to model adaptive expectations and

price/wage stickiness over time. Technically demanding.

● DSGE (Dynamic Stochastic General Equilibrium) models - Very complex

computational models of macroeconomy used for policy simulation. Cutting
edge.

2) Prioritising Price Stability Alone:

● Unemployment : overemphasising price stability without considering the impact on
employment can result in higher unemployment rates. Restrictive monetary or fiscal
policies aimed at controlling inflation may lead to reduced economic activity and job
losses.

Explanation for first bullet point :

The main policy tools for controlling inflation are monetary policy (interest rates) and fiscal
policy ( government spending and taxes) . Using these tools to curb inflation too
aggressively can slow economic growth and lead to higher unemployment.
For example, If a central bank raises interest rates sharply to reduce inflation, it makes the
cost of borrowing more expensive. This reduces overall demand in the economy , as
consumers and businesses cut back on spending. When companies see demand for their
products decline, they tend to reduce production and employment. Workers are laid off to cut
costs, therefore unemployment rises.

Likewise, tight fiscal policy like higher taxes and reduced government spending will leave the
public with less money to spend, reducing aggregate demand. WIth fewer dollars circulating
in the economy, production and employment again takes a hit.

Policymakers face a tradeoff between inflation and unemployment, referred to as the

phillips curve. Aggressively targeting very low inflation often necessitates tight monetary
and fiscal policies that can push unemployment higher. The human impact of job losses
must be weighed against the benefits of ultra low inflation.

This does not mean inflation should be allowed to run rampant. But a balanced approach
that allows for moderate inflation while also supporting adequate employment and economic
growth is often preferred. Ignoring the labour market implications and using blunt policy tools
to force inflation lower at any cost can cause unnecessary economic pain.

The key is finding the optimal balance, where inflation is contained but not at the expense of
massive job losses and reduced living standards.

Possible Diagrams I could use:

● Phillips Curve - Shows the inverse relationship between inflation and
unemployment. Illustrates how very low inflation targeted through tight
monetary policy can push unemployment higher.

● AD-AS model - Tight monetary policy to reduce inflation shifts aggregate

demand curve inward, lowering output and employment. Shows contractionary
effect.

● Business cycle diagram - Visualizes how excessive anti-inflation policies can

move the economy from expansion to contraction, increasing unemployment.

● Monetary policy transmission mechanisms - Model shows how interest rate

hikes aimed at price stability reduce investment and consumer spending,
decreasing jobs.

● Fiscal policy model - Displays how contractionary fiscal policy (tax hikes,
spending cuts) to control inflation slows economic activity and raises
unemployment.

● Okun's Law - Relates GDP growth to unemployment rate. Illustrates how

restrictive policies limiting growth in the name of price stability increase
joblessness.
 3) Singular Focus of Minimising Unemployment:
● Inflationary Pressure : Overemphasise the reduction of unemployment without
considering inflation can lead to inflationary pressure. If demand for labour exceeds
its supply, wages may rise, pushing up production costs and contributing to inflation.
Explanation:

Reducing unemployment is an aim for policymakers, as high unemployment represents

unused labour resources and hardship for jobless workers. However, taking measures of
lower unemployment without also considering the inflationary impacts can be problematic.

When the labour market is very tight, with unemployment below the natural rate, the demand
for workers exceeds the supply. Employers have to compete for scarce labour by offering
higher wages to attract talent.

These increasing labour costs get passed on to consumers in the form of higher prices for
goods and services, contributing to demand pull inflation. Workers who have pricing power
due to tight labour market conditions will also negotiate higher wages, fueling the cycle of
cost-push inflation.

If the central bank and government singularly focus on bringing down unemployment, like
through expansionary monetary and fiscal policies, it pumps more money into the economy
and stimulates consumer demand. THis high demand applies further pressure on
businesses to raise wages to secure workers.

As wages and production costs rise, businesses will increase prices to protect profit margins.
So without controls on inflation, a short sighted focus on minimising unemployment often
leads to an overheating economy and rising price levels.

Ideally, policymakers should aim to balance low unemployment with low, stable inflation.
Action to expand labour demand must be calibrated with supply dynamics so that wage-price
spirals do not get out of control. A nuanced approach is required, rather than a blind
emphasis on only unemployment at the expense of inflation.
Possible Diagrams I could use :

● Phillips Curve - This shows the inverse relationship between unemployment

and inflation. It illustrates how very low unemployment rates can lead to high
inflation. Graphically depicts the tradeoff policymakers face.

● AS-AD model - The aggregate supply and demand model shows how excess
aggregate demand (from expansionary policies to reduce unemployment) can
push up prices and cause demand-pull inflation. Illustrates imbalance.

● Labour supply and demand diagram - With policies stimulating labour demand
without regard for supply, this shows how the excess demand for labour leads
to higher wages. Graphically depicts the wage-price spiral mechanism.

● Production possibility frontier - This demonstrates the tradeoff between

unemployment and inflation policy targets. Shows how overemphasis on just
unemployment minimization can move the economy to a suboptimal point with
high inflation.

● AD-SRAS-LRAS diagram - Useful for showing both demand-pull and cost-push

inflationary effects of singular unemployment focus in short and long-run.
Illustrates inflationary pressures

4) Sole focus on maintaining a stable balance of payments:

● Economic Growth : Overemphasising the balance of payments without
considering economic growth can hinder overall economic development.
Restrictive policies aimed at improving the balance of payments, such as
reducing imports, may limit domestic demand and impede economic
expansion.
Explanation:

The balance of payments is a record of all international transactions undertaken between a

country and the rest of the world. It comprises the current account, capital account, and
financial account.

A country’s policy makers often prioritise keeping the overall balance of payments stable and
sustainable. However, an obsessive focus on this goal sometimes comes at the expense of
domestic economic growth.
For example, If policymakers are concerned about a large current account deficit, they may
impose restrictions on imports to boost exports. But , limiting imports of capital equipment,
technology, and raw materials can hurt productivity and growth of domestic industries.
Excessive controls on capital flows may also prevent foreign direct investment that could
stimulate the economy. Solely trying to reduce imports to balance payments flows means
foregoing economic benefits from trade.

Likewise, restrictive fiscal and monetary policies aimed at correcting balance of payments
tend to slow economic activity. Contractionary policies reduce domestic income and
purchasing power, which then depresses spending and growth.

Ideally, policymakers should pursue the twin goals of balance of payments stability and
reasonable economic growth. Total fixation on just one objective creates blind spots
regarding other economic outcomes.

Possible Diagrams i could use:

● Circular flow diagram - This shows how policies affecting imports, exports, and
capital flows influence money flows between domestic and foreign markets. It
illustrates how restrictive policies aimed at balance of payments stability
reduce these market interactions and flows, which can hinder economic
growth.

● Production possibility frontier - This shows the tradeoff between policies

supporting balance of payments stability (e.g. stimulating exports) vs
economic growth (e.g. consuming imports for investment). It shows how
maximising one target may compromise the other if not balanced properly.

● AD-AS diagram - This shows how contractionary monetary and fiscal policies
meant to correct balance of payments deficits can shift the aggregate demand
curve left, reducing national output and growth. It illustrates the tradeoff
between stabilising external position and internal economic objectives.

● Phillips Curve - This depicts the inverse relationship between unemployment

and economic growth. Policies limiting imports and growth to improve balance
of payments may increase unemployment as a side effect.