Following the economic downturn, the central bank implemented robust expansionary measures to stimulate economic activity. By lowering the main policy interest rate to historic lows and purchasing government securities, the central bank successfully boosted aggregate demand, prompting a swift recovery in consumer spending and business investment. As economic output expanded, businesses expanded their workforces, leading to a significant drop in the national unemployment rate.
However, as the labor market neared full capacity, severe labor shortages emerged across key sectors including manufacturing, construction, and hospitality. Employers reported having to offer significantly higher starting wages to attract and retain staff. These rising labor costs, coupled with supply-chain bottlenecks, began to feed into consumer prices. Analysts noted that 'concurrently pursuing low unemployment and its inflation target of 2.0% may generate policy conflicts.'
Extract C states that 'concurrently pursuing low unemployment and its inflation target of 2.0% may generate policy conflicts.'
With the help of a diagram, explain why a trade-off between price stability and low unemployment might occur.
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.