Macroeconomic objectives

Short-run growth: an increase in actual output (real GDP rises), caused by higher AD using existing capacity. Long-run growth: an increase in potential output (productive capacity), caused by improvements in factors of production shifting LRAS right.

Loss of income, lower living standards, stress, depression, family breakdown, loss of skills (human capital depreciation), social exclusion, and loss of self-esteem. Long-term unemployment has lasting "scarring" effects on individuals.

Cyclical (demand-deficient): caused by low AD during recessions. Structural: skills mismatch or declining industries. Frictional: short-term, between jobs. Seasonal: regular patterns tied to seasons. Each type requires different policy responses.

Lost output (economy operates below potential), lower tax revenue (less income tax, more benefits spending), reduced consumer spending, lower investment (firms pessimistic), brain drain (skilled workers emigrate), and rising government debt.

Higher living standards (more goods/services per person), lower unemployment, increased tax revenue for governments, reduced poverty, and greater investment in public services. Growth is the most powerful anti-poverty tool.

Unemployment caused by a fall in aggregate demand during an economic downturn. Firms reduce production and lay off workers because there is insufficient demand for their goods and services. It is the most damaging type.

Environmental degradation, resource depletion, income inequality (benefits not shared equally), inflation if AD grows faster than capacity, stress and reduced leisure time, and potential current account deficits from increased imports.

The idea that a period of high unemployment can become self-perpetuating. Long-term unemployed workers lose skills, become less employable, and drop out of the labour force. This effectively raises the natural rate of unemployment permanently.

Unemployment caused by a mismatch between workers' skills and the skills demanded by employers. This often results from technological change, globalisation, or the decline of specific industries (e.g., coal mining). It is long-term and hard to fix.

By the percentage change in real GDP over a period: Growth rate = [(Real GDP₂ − Real GDP₁) ÷ Real GDP₁] × 100. Real GDP per capita adjusts for population changes for a better measure of individual welfare.

Tax revenue falls (fewer workers paying income tax, less consumer spending → less VAT/sales tax). Government spending rises (unemployment benefits, social services). This widens the budget deficit and increases national debt.

The level of unemployment that exists even when the economy is at full employment. It includes frictional and structural unemployment but not cyclical. It represents the "normal" level of unemployment consistent with stable inflation.

A rightward shift of the LRAS curve (from LRAS₁ to LRAS₂), showing increased productive capacity. On a PPC diagram, the entire curve shifts outward. This represents genuine expansion of what the economy can produce.

Two methods: (1) Claimant count — those receiving unemployment benefits. (2) Labour force survey (ILO) — those actively seeking work. Both undercount: they miss discouraged workers, underemployed, and informal workers.

Some frictional unemployment is healthy — it means workers are matching to better jobs. A small unemployment pool gives firms hiring flexibility. Zero unemployment is neither achievable nor desirable — some turnover is natural and efficient.

A sustained increase in the general (average) price level over time. It means the purchasing power of money falls — each unit of currency buys fewer goods and services. It is measured as a percentage change (e.g., 3% per year).

Reduced purchasing power (fixed incomes suffer), uncertainty deters investment, menu costs (changing prices), shoe-leather costs (managing money), redistribution from savers to borrowers, loss of international competitiveness, and potential for hyperinflation.

An increase in aggregate demand that exceeds the economy's productive capacity. Possible causes: excess government spending, low interest rates, consumer optimism, depreciation boosting exports, or global boom increasing export demand.

Rising production costs that shift SRAS left: higher oil/commodity prices, wage increases exceeding productivity growth, higher taxes on firms, depreciation raising import costs, or supply chain disruptions.

A weighted index measuring the average price of a representative "basket" of goods and services purchased by a typical household. Changes in the CPI over time give the inflation rate. The weights reflect spending patterns.

Losers: savers (real value of savings falls), workers on fixed wages, lenders (repaid in devalued money), those on fixed incomes (pensioners). Winners: borrowers (repay less in real terms), asset owners (property values rise), the government (tax revenues rise, real debt falls).

Deflation can trigger a deflationary spiral: falling prices → consumers delay purchases (expecting lower prices) → firms lose revenue → cut jobs → less spending → prices fall further. Debt burden increases in real terms, worsening financial crises.

The basket may not reflect individual spending patterns. Quality improvements are hard to capture (a better phone at the same price isn't inflation). New products take time to be included. Weights change slowly. Regional price differences are ignored.

Milton Friedman argued "inflation is always and everywhere a monetary phenomenon." Excessive growth in the money supply leads to too much money chasing too few goods. If money supply grows faster than real output, inflation results.

If workers expect prices to rise, they demand higher wages. Firms pass these costs on as higher prices, which confirms the expectation — a wage-price spiral. Anchoring inflation expectations (through central bank credibility) is crucial.

Many economists argue that low inflation (around 2%) is healthy: it gives monetary policy room to cut real interest rates, allows relative wages to adjust downward without nominal cuts (which workers resist), and avoids the dangers of deflation.

Disinflation: the rate of inflation is falling (prices still rising, but more slowly, e.g., from 5% to 2%). Deflation: the price level is actually falling (negative inflation rate, e.g., −1%). Deflation is much more dangerous.

A weaker currency makes imports more expensive → higher cost of imported raw materials (cost-push) and imported consumer goods. For import-dependent economies, this is a major inflation channel.

Extremely rapid inflation (often >50% per month). Usually caused by excessive money printing to finance government deficits. Money becomes worthless, the economy collapses into barter, and social/political instability follows. Examples: Zimbabwe (2008), Venezuela (2018).

Inflation excluding volatile items like food and energy prices. Core inflation gives a clearer picture of underlying inflation trends because food and energy prices fluctuate widely due to supply shocks and seasonal factors.

Rapid economic growth (especially demand-driven) can push the economy beyond capacity, causing demand-pull inflation. Governments face a trade-off: stimulate growth (risking inflation) or control inflation (risking slower growth).

An inverse relationship between the rate of inflation and the rate of unemployment. When unemployment is low, inflation tends to be high (and vice versa). It implies a short-run trade-off between the two objectives.

By shifting LRAS right, supply-side policies can deliver growth with lower inflation (more capacity = less price pressure), lower natural unemployment, and improved competitiveness (better current account). They reduce the trade-off between objectives.

When AD rises, firms produce more and hire more workers (unemployment falls), but competing for scarce workers and resources pushes wages and prices up (inflation rises). Boosting employment comes at the cost of higher inflation.

Economic growth typically increases resource use, carbon emissions, pollution, and habitat destruction. Sustainable development tries to reconcile growth with environmental protection, but this often involves trade-offs and higher costs.

Using demand-side AND supply-side policies together: e.g., expansionary fiscal policy to reduce cyclical unemployment combined with education spending to reduce structural unemployment and shift LRAS. Different tools target different objectives simultaneously.

A vertical line at the natural rate of unemployment (NRU). In the long run, there is no trade-off: any attempt to push unemployment below the NRU with demand stimulus only leads to accelerating inflation with no permanent reduction in unemployment.

Growth may increase inequality if benefits flow disproportionately to capital owners and skilled workers. Tax cuts and deregulation may boost growth but widen the gap. Redistribution policies may reduce inequality but dampen growth incentives.

Governments must decide which objectives are most urgent given current conditions. In a recession: prioritise growth and employment. During high inflation: prioritise price stability. Priorities change with the economic cycle.

In the 1970s during stagflation — high inflation AND high unemployment simultaneously (caused by oil price shocks). This contradicted the original Phillips curve which predicted they couldn't both be high at the same time.

Identify which objectives are in conflict, explain the mechanism (why achieving one worsens another), use AD/AS or Phillips curve diagrams, evaluate whether the conflict can be reduced, and discuss short-run vs long-run perspectives.

Lower unemployment means higher incomes and consumer spending, which often increases demand for imports. If exports don't rise proportionally, the current account balance worsens. Booming economies often see widening trade deficits.

Policies that achieve one objective often worsen another (e.g., expansionary policy reduces unemployment but may cause inflation). Resources are scarce and policy tools have trade-offs. This is the fundamental dilemma of macroeconomic policy.

Yes. Growth is needed to raise living standards and reduce poverty, but it can cause inflation, environmental damage, and inequality. The quality and type of growth matters — sustainable, inclusive growth addresses these concerns better than growth at any cost.

Supply-side policies that reduce the NRU (education, labour market reforms, reducing structural unemployment) shift the long-run Phillips curve to the left, allowing lower unemployment without higher inflation.

The SRPC shows an INVERSE relationship between unemployment and inflation: lower unemployment → higher inflation, and vice versa. Originally observed by A.W. Phillips (1958) using UK wage data. It suggests a TRADE-OFF: policymakers can reduce unemployment but at the cost of higher inflation.

When unemployment is low, firms compete for scarce workers → wages rise → costs rise → prices rise (cost-push inflation). Also, high employment = high consumer spending → demand-pull inflation. When unemployment is high, the opposite: less wage pressure, less spending, lower inflation.

The SRPC shifts when EXPECTATIONS of inflation change or there's a supply shock. RIGHT/UP shift: higher expected inflation (workers demand higher wages), higher oil prices, supply disruption. LEFT/DOWN shift: lower inflation expectations, positive supply shock. Each SRPC is drawn for a GIVEN level of expected inflation.

The LRPC is VERTICAL at the natural rate of unemployment (NRU). Monetarists (Friedman/Phelps) argued that in the long run there is NO trade-off between unemployment and inflation. The economy returns to the NRU regardless of the inflation rate. Any attempt to push unemployment below NRU causes accelerating inflation.

Start at NRU with 2% inflation. Government boosts AD → unemployment falls below NRU, inflation rises to 4% (move along SRPC₁). Workers notice higher inflation → demand higher wages → firms cut jobs → unemployment returns to NRU BUT at 4% inflation. SRPC shifts UP to SRPC₂. If repeated: accelerating inflation.

The LRPC shifts when the NATURAL RATE of unemployment changes. Leftward shift (lower NRU): better education/training, reduced job search friction, lower unemployment benefits, more flexible labour markets. Rightward shift (higher NRU): structural economic decline, increased frictions.

DEMAND-SIDE policies (fiscal/monetary) can reduce unemployment TEMPORARILY (move along SRPC) but NOT permanently. In LR, economy returns to NRU with higher inflation. Implication: demand management creates inflation without lasting employment gains. Only SUPPLY-SIDE policies can reduce the NRU (shift LRPC left).

KEYNESIAN: The trade-off exists, especially when unemployment is high. The SRPC is relatively stable. Active demand management can be effective. MONETARIST: Trade-off is only short-run. LRPC is vertical at NRU. Expansionary policy causes accelerating inflation. Favour rules-based monetary policy.

DISINFLATION: falling rate of inflation (e.g. 6% → 3%). Can be achieved by moving along the SRPC — accepting higher unemployment temporarily. DEFLATION: negative inflation rate. Costly disinflation may require a recession. The sacrifice ratio = %Δ unemployment / %Δ inflation reduction.