Why do macroeconomic objectives conflict, and what does the Phillips curve say about inflation and unemployment?
2.3 Policy conflicts and trade-offs: the conflicts between macroeconomic objectives, the short-run Phillips curve trade-off between inflation and unemployment, and the long-run Phillips curve.
An OCR H460 answer to policy conflicts and trade-offs, covering the conflicts between macroeconomic objectives, the short-run Phillips curve trade-off between inflation and unemployment, the role of expectations, and the vertical long-run Phillips curve.
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What this dot point is asking
OCR wants you to explain why macroeconomic objectives conflict, to describe the short-run Phillips curve trade-off between inflation and unemployment, to explain the role of expectations, and to explain the vertical long-run Phillips curve at the natural rate of unemployment.
Why objectives conflict
The main conflicts are: growth (or low unemployment) versus inflation (demand-led growth near capacity causes demand-pull inflation); growth versus the current account (faster growth sucks in imports); growth versus the environment (output can carry negative externalities); and equity versus efficiency (redistribution can blunt incentives). The most examined is the inflation-unemployment trade-off, captured by the Phillips curve.
The short-run Phillips curve
Expectations and the long-run Phillips curve
The implication is that demand policy cannot permanently hold unemployment below the natural rate; doing so only accelerates inflation. To reduce unemployment in the long run, a government must lower the natural rate through supply-side policies (training, improved labour-market flexibility, reducing structural and frictional unemployment), which shift the long-run Phillips curve left.
Resolving conflicts
Because of these trade-offs, governments prioritise according to the state of the economy (taming high inflation versus fighting a recession) and increasingly rely on supply-side policy, which can improve several objectives at once by shifting LRAS right and lowering the natural rate, sidestepping the short-run trade-offs of demand management.
Examples in context
- The 1970s stagflation. High inflation alongside high unemployment challenged the simple Phillips curve and supported the expectations-augmented, vertical long-run view.
- The 2021 to 2023 episode. Very low unemployment alongside a tight labour market coincided with surging inflation, illustrating the short-run trade-off.
- Inflation-targeting credibility. Central-bank independence anchors inflation expectations, which keeps the short-run Phillips curve from drifting up.
Try this
Q1. Explain the trade-off shown by the short-run Phillips curve. [3 marks]
- Cue. Inverse relation: lower unemployment comes with higher inflation as the tighter labour market raises wages and prices.
Q2. Explain why the long-run Phillips curve is vertical. [4 marks]
- Cue. Expectations adjust, so holding unemployment below the natural rate only raises inflation; unemployment returns to the natural rate.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR H460/02 20215 marksExplain, using the short-run Phillips curve, the trade-off a government faces between inflation and unemployment.Show worked answer →
A short structured question. State that the short-run Phillips curve shows an inverse relationship between the rate of inflation and the rate of unemployment.
Develop the chain: if the government expands aggregate demand to cut unemployment, the tighter labour market bids up wages and prices, so inflation rises; conversely, reducing inflation through tighter policy raises unemployment. So in the short run a government cannot reduce both at once; it must trade one against the other, moving along the short-run Phillips curve. Reference the AD link (the Phillips curve mirrors the AD-AS trade-off).
Markers reward the inverse relationship, the mechanism (demand and the labour market), and the conclusion that both cannot fall together in the short run.
OCR H460/02 202312 marksAssess the view that there is no long-run trade-off between inflation and unemployment.Show worked answer →
A levels-of-response question. Knowledge and application: explain the short-run Phillips curve trade-off, then the long-run (expectations-augmented) view: the long-run Phillips curve is vertical at the natural rate of unemployment, so attempts to hold unemployment below it only raise inflation as expectations adjust.
Analysis: develop how, once workers expect higher inflation, they demand higher wages, shifting the short-run Phillips curve up, returning unemployment to the natural rate at higher inflation.
Evaluation: weigh the monetarist view against Keynesian criticisms (hysteresis, sticky expectations, evidence of periods with both high) and the role of supply-side policy in lowering the natural rate. Conclude with a supported judgement, for example that there is little long-run trade-off via demand, so reducing structural unemployment needs supply-side measures.
Related dot points
- 2.3 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 OCR H460 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.
- 2.3 Monetary policy and the financial sector: interest rates and the transmission mechanism, quantitative easing, the role of the central bank and the inflation target, the functions of the financial sector, and financial regulation.
An OCR H460 answer to monetary policy and the financial sector, covering interest rates and the monetary transmission mechanism, quantitative easing, the role of the central bank and the inflation target, the functions of banks and the financial sector, and the case for financial regulation.
- 2.3 Supply-side policies: market-based and interventionist supply-side policies, their effect on LRAS and the macroeconomic objectives, and their costs, time lags and limitations.
An OCR H460 answer to supply-side policies, covering market-based and interventionist supply-side measures, how they shift long-run aggregate supply and help achieve several macroeconomic objectives at once, and their costs, time lags and limitations.
- 2.1 Economic policy objectives: economic growth, low and stable inflation, low unemployment, a satisfactory balance of payments, and other objectives such as low inequality and environmental sustainability.
An OCR H460 answer to the macroeconomic objectives, covering economic growth, low and stable inflation, low unemployment and a satisfactory balance of payments, plus wider objectives such as low inequality and environmental sustainability, and how performance is judged and traded off.
Sources & how we know this
- OCR A Level Economics (H460) Specification — OCR (2023)