Macroeconomic Aims

Achieving one aim often makes another harder. A typical 4-mark "conflicts" question rewards two clearly distinct conflicts, each explained.

Growth vs low inflation (demand-pull)

The most common conflict. When the government uses expansionary fiscal or monetary policy (cutting taxes, raising public spending, cutting interest rates) to lift growth, aggregate demand rises. If demand rises faster than the economy's productive capacity can match, the result is demand-pull inflation.

So pursuing growth in the short run typically pushes the inflation rate up.

Low unemployment vs low inflation (the Phillips curve)

The Phillips curve describes a short-run trade-off: pushing unemployment below the natural rate creates wage and price inflation.

The mechanism: when unemployment is very low, firms compete for the small pool of available workers and bid wages up. Higher wages raise firms' costs, which they pass on as higher prices. Inflation rises.

So a government that pushes unemployment too low in the short run accepts a faster inflation rate as a side-effect.

Growth vs balance of payments

When incomes rise, consumers buy more imported goods (cars, electronics, foreign holidays). Imports are income-elastic in most countries.

So as growth raises incomes, imports rise faster than exports, and the current account deficit widens. Pursuing growth in this sense worsens the BoP position.

Growth vs equitable distribution

Growth raises average incomes but does not always raise everyone's income equally. Returns on capital, high-skilled wages, and ownership of property often grow faster than low-skilled wages. The result can be rising inequality alongside rising GDP.

So pursuing growth without redistributive policies may worsen the income-distribution aim.

When the conflicts ease: supply-side policies

Not every policy creates conflict. Supply-side policies that raise the productive capacity of the economy (better education and training, infrastructure, R&D, deregulation) can lift growth without pushing inflation up, because they shift aggregate supply rather than aggregate demand. Long-run supply-side improvement is the cleanest way out of the growth-inflation trade-off.