Business Economics Principles

Business Economics Principles

  • Submitted By: auvro
  • Date Submitted: 12/23/2010 1:57 AM
  • Category: Business
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Answer 10

(a) What are the four macroeconomic goals for any country? Is there a conflict between achieving all of them at the same time?

The four macroeconomic goals of any country are:

Full employment

Price stability (low price inflation)

Economic growth, and

Avoid trade deficit.

(Layton et al, 2005; pg 379-387, 349)

Each macroeconomic goal when achieved independently, improves the overall wellbeing of the country. However, in order to achieve one goal the other goals may be difficult to achieve. Policies that promote economic growth might create unemployment or policies that improve price stability might limit economic growth. For example: the Reserve bank may want to promote lower rates of unemployment through changing monetary policies. As a result, the economy may expand, unemployment may fall, and full employment may be achieved, but inflation may emerge from an over stimulated economy.

(b) Which is worse, higher inflation or higher unemployment and explain why?

An inverse relationship exists between inflation and unemployment. While both inflation and unemployment have negative affect on the achievement of macroeconomic growth of a county a trade off needs to made as to which has a more negative affect (relative cost). The relative size of the effects from the unemployment rate and the inflation rate is difficult to measure and depends on monetary policies. The issue here is to measure the effects of a 1-percentage point change in unemployment compared to a 1 percentage point change in inflation (marginal rate of substitution between unemployment and inflation). Inflation has some positive as well as negative effects. It causes house prices to increase, debt becomes more manageable, wages increase. But buying power decreases and higher interest rates cause economy to slow down. High unemployment enables companies to keep wages lower, therefore prices lower, and generally leads to growth. But,...

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