Why do macroeconomic objectives conflict, and what does the Phillips curve say about inflation and unemployment?
Policy conflicts and the Phillips curve: the trade-offs between macroeconomic objectives, the short-run Phillips curve relationship between inflation and unemployment, the long-run Phillips curve, and the role of expectations.
An Eduqas A520 answer to macroeconomic policy conflicts, covering the trade-offs between growth, inflation, unemployment and the current account, the short-run Phillips curve trade-off between inflation and unemployment, the vertical long-run Phillips curve, and the role of inflation expectations.
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What this dot point is asking
Eduqas wants you to explain why the macroeconomic objectives conflict, set out the short-run Phillips curve trade-off between inflation and unemployment, explain the vertical long-run Phillips curve and the natural rate of unemployment, and analyse the role of inflation expectations. This pulls together the policy levers and shows why governments cannot meet every objective at once.
Why objectives conflict
The short-run Phillips curve
The long-run Phillips curve and the natural rate
The role of expectations
Examples in context
- The 1970s. Stagflation (high inflation and high unemployment together) discredited a simple, stable Phillips-curve trade-off and supported the expectations-augmented view.
- Inflation targeting. Anchoring expectations through an independent Bank of England has kept the short-run trade-off favourable for long periods.
- Supply-side reform. Policies to cut the natural rate (training, labour-market flexibility) aim to shift the vertical LRPC left, allowing lower unemployment without inflation.
Try this
Q1. Explain why the long-run Phillips curve is vertical. [4 marks]
- Cue. In the long run unemployment returns to the natural rate whatever the inflation rate, because inflation expectations adjust, so there is no permanent trade-off; only the inflation rate differs.
Q2. Explain one conflict between macroeconomic objectives that a government might face. [4 marks]
- Cue. For example growth versus the current account: faster growth raises imports and worsens the current account; or unemployment versus inflation via the short-run Phillips curve.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas Component 1 20192 marksExplain what the short-run Phillips curve shows.Show worked answer →
A 2-mark explain question. One mark for the relationship, one for development.
The short-run Phillips curve shows an inverse (trade-off) relationship between the rate of inflation and the rate of unemployment: lower unemployment is associated with higher inflation, and vice versa. Development: this is because boosting aggregate demand to cut unemployment also pulls up wages and prices (demand-pull inflation).
Markers reward the inverse relationship between inflation and unemployment and the link to aggregate demand.
Eduqas Component 3 (macro) 202112 marksEvaluate the view that a government can always reduce unemployment by accepting higher inflation.Show worked answer →
A levels-of-response essay. Knowledge and application: explain the short-run Phillips curve trade-off (boosting AD lowers unemployment but raises inflation) and contrast it with the long-run Phillips curve, which is vertical at the natural rate of unemployment, so there is no permanent trade-off.
Analysis: develop how, in the short run, expansionary policy moves the economy up the short-run Phillips curve, cutting unemployment at the cost of inflation.
Evaluation: weigh the long-run view: once workers' inflation expectations adjust, unemployment returns to the natural rate at a higher inflation rate, so trying to hold unemployment below the natural rate just accelerates inflation. The natural rate can only be lowered by supply-side policy. Conclude with a supported judgement that the trade-off holds only in the short run.
Related dot points
- Fiscal policy: government spending and taxation, the budget balance and the national debt, direct and indirect and progressive and regressive taxes, automatic stabilisers, and the strengths and weaknesses of fiscal policy.
An Eduqas A520 answer to fiscal policy, covering government spending and taxation, the budget balance and the national debt, direct versus indirect and progressive versus regressive taxes, automatic stabilisers, and the strengths and weaknesses of fiscal policy in managing aggregate demand.
- Monetary policy: interest rates and the transmission mechanism, the role of the central bank and inflation targeting, quantitative easing, and the strengths and weaknesses of monetary policy.
An Eduqas A520 answer to monetary policy, covering how the central bank uses interest rates and the money supply, the monetary transmission mechanism, inflation targeting and the role of an independent central bank, quantitative easing, and the strengths and weaknesses of monetary policy.
- Supply-side policies: market-based and interventionist supply-side policies, their effect on long-run aggregate supply and the objectives, and their costs, limits and time lags.
An Eduqas A520 answer to supply-side policies, covering the distinction between market-based and interventionist supply-side policies, how they shift long-run aggregate supply to raise potential output, their effect on the macroeconomic objectives, and their costs, limits and long time lags.
- Unemployment: its measurement by the claimant count and the Labour Force Survey, the causes of unemployment (cyclical, structural, frictional and real-wage), and the economic and social costs of unemployment.
An Eduqas A520 answer to unemployment, covering the two measures (the claimant count and the International Labour Organisation Labour Force Survey), the main causes (cyclical, structural, frictional and real-wage unemployment), and the economic and social costs of unemployment, including the distinction between unemployment and underemployment.
Sources & how we know this
- Eduqas A Level Economics Specification (A520) — Eduqas (2015)