Potential Conflict between

Macroeconomic Objectives
Unit 11 - Lesson 4
Learning outcomes:
● Define terms in orange bold in section 11.3. (AO1)
● Discuss the trade-off between inflation and unemployment based on: (HL
only):
○ The short-run and long-run Phillips curve (AO3)
○ AD-AS diagrams (AO4)
○ Phillips Curve diagram (AO4)
● Discuss the potential conflict between (AO3)
○ Low unemployment and low inflation
○ High economic growth and low inflation
○ High economic growth and environmental sustainability
○ High economic growth and equity in the income distribution
Low Unemployment and Low Inflation
● Based on the Phillips Curve there is potential for a trade-off between low
unemployment and low inflation.
○ The trade-off occurs when there are changes in Aggregate Demand
■ Increase in Aggregate Demand lead to an increase in Average Price
Levels (inflation), increase in output produced (Real GDP) which
leads to an increase in employment.
● Therefore increases in Aggregate Demand causes increases in
Average Price Levels (inflation) and a decrease in
unemployment.
○ This results in conflicting objectives.
High Economic Growth and Inflation
Demand Pull Inflation and Economic Growth

● Keynesian Model
○ Increases in Aggregate Demand along the horizontal section of the
Aggregate Supply will result in increases in Real GDP (economic growth)
with no changes in Average Price Levels.
■ Therefore there is no conflict between economic growth and inflation
○ Increases in Aggregate Demand past the full level of employment will
result in increases in Real GDP (economic growth) and increases in
Average Price Levels (inflation).
■ Therefore there is a conflict between economic growth and inflation
High Economic Growth and Inflation
● Monetarist/New Classical Model
○ In either a deflationary (recessionary) or inflationary gap, increases in
Aggregate Demand will result in increases in Real GDP (economic
growth) and increases in average price levels (inflation).
■ Therefore there is a conflict between economic growth and inflation.
The only way that increase in Aggregate Demand will not be inflationary is if there
is an increase in Aggregate Supply that matches the increase in Aggregate
Demand.
In other words, if the economy can supply the necessary output to satisfy the
increase in demand for output (Real GDP) then average price levels will not
increase.
High Economic Growth and Inflation
Cost-push Inflation

● Is caused by an increase in resource prices in an economy.

● This results in a decrease in the Short-run Aggregate Supply (SRAS)
○ A decrease in SRAS leads to an increase in average price levels
(inflation), a decrease in Real GDP (economic growth) and therefore a
decrease in demand for workers.
■ Cost-push Inflation conflicts with all Macroeconomic Objectives -
Increase in inflation, decrease in economic growth and an increase
in unemployment.
High Economic Growth and Sustainability
● High economic growth such as in Southeast Asia results in an overuse of
Common Pool Resources threatening sustainability.
● Modern Growth Theory
○ States there is a certain level of economic growth that would not deplete
resources.
■ To achieve sustainability a certain amount of economic growth must
be sacrificed.

Therefore there is a conflict between economic growth and sustainability.

● High economic growth will conflict with sustainability.

● Sustainability will require a reduced amount of economic growth.
○ Therefore they conflict.
High Economic Growth & Equity in Income Distribution
What we know…

● High rates of economic growth and

neither “good” nor “bad” for an
economy.
○ This is dependent on the
governmental policies that are
adopted.