Possible Conflicts between macroeconomic Objectives -Macroeconomic Objectives and Policies

The short-run Phillips curve is a downward-sloping curve showing the inverse relationship between the rate of inflation and the rate of unemployment in the short run (1). It illustrates a trade-off: lower unemployment tends to be associated with higher inflation, and vice versa (1).

Economic growth means rising real incomes across the economy (1). As households and firms become better off, they spend more, and part of that extra spending goes on imported goods and services (1). With imports rising while exports are unchanged, the current account moves towards deficit (or an existing deficit widens) (1). So faster, consumption-led growth conflicts with the objective of a sustainable current account: the very rise in incomes that signals success also worsens the trade position (1).

The short-run Phillips curve shows an inverse relationship between inflation and unemployment. On a diagram with the inflation rate (%) on the vertical axis and the unemployment rate (%) on the horizontal axis, the curve slopes downward, so any point of low unemployment corresponds to high inflation and any point of high unemployment corresponds to low inflation.

Suppose the government wants to reduce unemployment. To do so it boosts aggregate demand — for example through lower interest rates or higher government spending. As firms expand output to meet the extra demand, they take on more workers, so unemployment falls and the economy moves along the curve from a high-unemployment point (B) towards a low-unemployment point (A).

However, as the labour market tightens, spare capacity shrinks: workers can bargain for higher wages and firms facing strong demand raise prices. The result is higher inflation. So the movement from B to A that cut unemployment has raised inflation — the government cannot reduce both at the same time by shifting AD.

This is the essence of the trade-off: in the short run, reducing unemployment is 'bought' at the cost of higher inflation, and reducing inflation (by cutting AD) is 'bought' at the cost of higher unemployment. A government moving along the short-run Phillips curve must therefore choose which objective to prioritise.

Faster economic growth means the economy produces more goods and services over time. Producing this extra output typically requires more energy, more raw materials and more transport, and it generates more waste and emissions. This is the root of the conflict with the objective of protecting the environment.

The mechanism. As output expands, firms burn more fossil fuels, extract more natural resources and release more pollution and carbon emissions. These are negative externalities of production — costs (dirty air, damaged ecosystems, climate change) borne by third parties and future generations, not paid for by the producers. Growth also depletes finite resources (forests, minerals, fish stocks), which can make the growth itself unsustainable. So a policy that successfully raises output can simultaneously worsen environmental quality: the two objectives pull against each other.

Applied to the extract. An economy pursuing rapid industrial, output-led growth — for example through heavy manufacturing or fossil-fuel energy — would be expected to see rising emissions and resource use alongside its rising GDP, exactly the conflict described.

How far it is a genuine conflict. The conflict is not automatic. If growth is driven by clean/green technology, renewable energy and tighter environmental regulation, output can rise while the environmental damage is limited — 'green growth'. Moreover, richer economies can afford to spend more on protecting the environment, so beyond a point growth may help fund clean-up. The strength of the conflict therefore depends on what kind of growth an economy pursues.

Overall, output-led growth conflicts with the environment through greater pollution and resource depletion, but the conflict can be weakened where growth is green and well regulated.

Whether growth can be achieved without inflation depends on how the growth is generated — through aggregate demand or through aggregate supply.

The conflict when growth is demand-led. If a government boosts growth by raising AD — a consumer boom, higher government spending, or looser monetary policy — the effect can be inflationary. On a diagram with the price level (P) on the vertical axis and real GDP (Y) on the horizontal axis, AD shifts right from AD to AD₁ along an upward-sloping SRAS. Equilibrium moves from E to E₁: real output rises from Y* to Y₁ (the growth) but the price level also rises from P* to P₁ (demand-pull inflation). The nearer the economy is to full capacity, the steeper SRAS is, so more of the extra AD becomes inflation rather than extra output. In this case growth and low inflation clearly conflict.

Why growth need not always be inflationary. The trade-off is far weaker in two cases. First, if the economy has large spare capacity (a deep negative output gap, the flat region of AS), a rise in AD raises output with little inflation, because idle workers and machines can be brought back into use. Second, if growth is supply-led — a rightward shift of LRAS from investment, better skills, technology and higher productivity — capacity itself expands, so output can rise without upward pressure on prices. This is non-inflationary growth, the aim of supply-side policy.

Evaluation. The answer therefore depends on several things.

• It depends on spare capacity: near full capacity, demand-led growth is inflationary; with a large output gap, it is not.
• It depends on the source of growth: demand-led growth risks inflation, whereas supply-led (LRAS) growth need not.
• It depends on the time frame: supply-side improvements (education, infrastructure) take years to shift LRAS, so in the short run governments may have little choice but demand-side stimulus.

Judgement. A government can achieve growth without inflation, but usually only when there is spare capacity or when the growth comes from the supply side (a rightward LRAS shift). Growth driven by higher AD at or near full capacity will tend to be inflationary. The most defensible conclusion is that low-inflation growth is achievable but requires either spare capacity or supply-side policy — demand-led growth alone, near capacity, forces a trade-off with inflation.

The claim that low inflation and low unemployment cannot be achieved together rests on the short-run Phillips curve trade-off. Whether it holds depends on the time frame, the source of any policy, and the state of the economy.

The case that the objectives conflict. The short-run Phillips curve shows an inverse relationship between inflation (vertical axis) and unemployment (horizontal axis). Suppose a government uses demand-side policy to cut unemployment: it boosts AD, firms expand output and hire more workers, and unemployment falls. But the tighter labour market pushes up wages, and strong demand lets firms raise prices, so inflation rises. Moving the other way — tightening policy to cut inflation — reduces AD, output and hiring, so unemployment rises. On this reasoning the two objectives genuinely trade off: pursuing one by managing demand worsens the other, and a government must choose which to prioritise. This is why episodes of very low unemployment are often accompanied by rising inflation, and why disinflation policies have historically raised unemployment.

The case that both can be achieved together. The conflict is far from absolute. First, the Phillips-curve trade-off is a short-run relationship; many economists argue that in the long run there is no permanent trade-off, because the economy returns to a 'natural' rate of unemployment — so low inflation and low unemployment can coexist once expectations settle. Second, and most importantly, supply-side policy can improve both objectives at once: better education and training, stronger work incentives, and higher productivity reduce unemployment (especially structural unemployment) while easing inflationary pressure by expanding capacity (a rightward shift of LRAS). Growth generated this way is non-inflationary. Third, when the economy has large spare capacity (a deep recession), a rise in AD can cut unemployment with little inflation, because idle resources are simply brought back into use — so even demand-side policy need not force the trade-off there. Fourth, the two objectives are partly complementary: sustained low, stable inflation supports the confidence and investment that keep unemployment low over time.

Evaluation and judgement. Whether a government can achieve both depends on which tools it uses and on the state of the economy. Using demand-side policy alone, near full capacity, the short-run Phillips curve makes the trade-off real — low inflation and low unemployment cannot be reached together, and the government must choose. But this is not an iron law: with spare capacity, or by using supply-side policy to raise capacity and employability, both objectives can improve at once, and in the long run the short-run trade-off largely disappears. The most defensible conclusion is that the view is only true in the short run and when policy works through aggregate demand; a government that combines demand management with supply-side reform — and that acts when there is spare capacity — can realistically pursue both low inflation and low unemployment. The conflict is therefore genuine but conditional and surmountable, not permanent.