Question

Macroeconomic policy is about making difficult decisions involving tradeoffs.Examples of these tradeoffs.(200-300 words)

Answer 1

Tradeoffs:- Trade off is an exchange where we give up one thing in order to get something else that we also desire.

Examples for macroeconomic policy tradeoffs:

• Unemployment and inflation: The Philips curve shows the trade off between inflation and unemployment. There is a demand side policy introduce to reduce the unemployment will make a conflict with the price stability. As the unemployment falls there is increase in the level of wage rate. This cause inflation and higher unit cost for labours. This trade off is favourable in short run because the aggregate supply is elastic.

• Growth and inflation: The increasing level of growth leads to growth. Effective supply side factors can reduce the conflict between growth and inflation. The fast growing economy suffers inflation which has negative effect on trade performance, business and profits.

• Economic growth and Balance of Payment: When real income increase consumer tend to consume more and induce the imports which worsen the trade balance. And also the high level dependence of internationally traded goods and services.