Question

What are the tradeoff decisions in macroeconomic policy? Interpret it. (200-300 words)

Answer 1

In economics, the term trade-off is often expressed as an opportunity cost, which is the most preferred possible alternative. A trade-off involves a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to buy 'good B,' because they want to buy 'good A' instead.

There are many macro economics objective of every country , but it is bit harder to achieve all the objectives at a same time . Some want to achieve Price stability , other wants  balanced economic growth, some wants falling unemployment so other wants equilibrium on a country’s external balance of payments.

One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.

Other conflicts may rise between economic growth and budget deficit . A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.Similarly, if the government wants to boost the rate of economic growth it could pursue expansionary fiscal policy (tax cuts/spending rises). This should increase aggregate demand and help economic growth – but there will be a side effect, the budget deficit will rise.

The Phillips Curve shows a trade-off between inflation and unemployment. A demand-side policy to reduce unemployment could conflict with price stability

So these type of conflicts may rise in the economy , solution is take a rational decision and choose a prospective that best fit's for the economy in that scenario .