To combat economic stagnation, governments often deploy expansionary fiscal programs, raising public expenditure on infrastructure and lowering income taxes to stimulate aggregate demand. Such interventions aim to achieve low unemployment and elevate living standards. However, as aggregate demand surges, structural bottlenecks and resource constraints can emerge. Tight labor markets can drive up wage rates, and increased consumer demand often spills over into imports, widening the current account deficit. Consequently, the pursuit of near-full employment can run directly counter to the objectives of price stability and balance of payments equilibrium. (Lines 1–9)
The primary mandate of the central bank is maintaining price stability, typically targeting a low inflation rate of around 2%. When inflation climbs above target, the bank uses contractionary monetary policy—raising policy interest rates and unwinding asset purchase programs. While effective at dampening consumption and investment to cool down the economy, this policy risks raising borrowing costs for firms and households. This contractionary pressure can lead to a rise in unemployment and a slowdown, or even contraction, in real GDP growth, illustrating the inherent trade-offs between inflation control and economic growth. (Lines 1–9)
Extract C (lines 1–2) states: 'To combat economic stagnation, governments often deploy expansionary fiscal programs...'
Using the data and your knowledge of economic policy, assess the extent to which conflicts between macroeconomic policy objectives limit the ability of policymakers to achieve both low inflation and low unemployment.
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.