Conflicts between government aims

Some economists argue that there will often be conflicts between government aims.

Unemployment and Inflation

Reducing unemployment is one of the aims of the government. In times of rising aggregate demand unemployment will be falling. If aggregate supply can match with the rising aggregate demand, then it is a very favourable situation. However, if the aggregate supply cannot match with the rise in aggregate demand, then there will be inflation. And controlling inflation is one of the aims of the government macroeconomic policies. Therefore, to control inflation, government may have to do something to reduce aggregate demand, which in turn will increase unemployment.

Inflation, Economic growth and balance of payment

Increasing aggregate demand could also lead to rising output therefore economic growth. Again, rising demand may cause prices to rise and people may spend a lot of their money on imported goods causing balance of payment problems.

Conflicts does not necessarily happen

Not all economists agree that there is a trade-off between government aims. That is, there is no reason why low rates of unemployment and high economic growth should always be associated with high rates of inflation and favourable balance of trade.

Similarly, low inflation and a favourable current account balance on trade need not be experienced at the same time as high unemployment and slow growth.

Just like mentioned above, rising aggregate demand causes problems only if the aggregate supply cannot match the rising aggregate demand. Therefore, the government has to carefully implement supply side policies too.

If price inflation in a country could in this way be reduced to a low level, then the low rates of unemployment, high economic growth and a favourable balance of trade on current account would follow.

Reducing inflation will make a country’s goods more competitive in the international market. Demand for its products will rise at home and abroad too. Increased demand for exports will improve the balance of trade. Firms will need to increase output to meet this demand. Therefore jobs will also be created for the unemployed. This will boost economic growth.

Therefore, if the economy is carefully managed, conflicts does not necessarily happen.

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