Policy Conflicts GapFill

A central obstacle in the management of a macroeconomy is the conflict between different policy objectives. It is important to be familiar with some of these conflicts.

Firstly, the pursuit of economic growth can have a negative effect on  economic growthlow inflationthe balance of paymentssupply-side policies. This is because growth leads to an increase in  unemploymentnegative externalitiesinvestmentprices, which makes exports less competitive, while at the same time increasing incomes boosts demand for imports.

Secondly, monetary policy can have a negative effect on the implementation of  low inflationsupply-side policieseconomic growththe balance of payments. This is because rising interest rates reduce the level of   negative externalitiesunemploymentinvestmentprices, which may create a negative output gap as government expenditure has previously increased the productive capacity of the economy.

Thirdly,  negative externalitiespricesinvestmentunemployment such as inequality and environmental degradation are commonly associated with  supply-side policieslow inflationthe balance of paymentseconomic growth. This may be because the gains associated with increased economic activity are not distributed equally, across geographical and/or generational divides, or other divides within society. In addition, an increase in economic activity is often at the expense of environmentally sustainable practices.

A fourth notable policy conflict is identified by the Phillips curve theory, which contends that periods of low unemployment drive up demand for labour, which in turn acts to drive up wages. This contradicts classical economic theory, which contends that the supply of labour exceeding demand will lead to increased  unemploymentnegative externalitiespricesinvestment. This theory therefore claims to have identified a conflict between high levels of employment and  supply-side policiesthe balance of paymentseconomic growthlow inflation, as wage rises are a primary contributor to price rises.