Why Can't Governments Meet Every Macroeconomic Objective?
Why can't governments achieve all macroeconomic objectives at once? Learn how policies can affect growth, unemployment, inflation and the current account.
Governments cannot always achieve every macroeconomic objective at once because a policy that improves one outcome can make another worse. The conflict depends on the state of the economy, so it is not inevitable.
Scope: AS Level Government macroeconomic intervention (5.1.1) covers price stability, low unemployment and economic growth. Policy conflicts and trade-offs are A Level content (10.3.2).
Where does the conflict come from?
Suppose a government increases spending to raise aggregate demand: total planned spending in the economy. Firms may produce more and hire more workers, supporting growth and reducing unemployment. But if firms are already close to their productive capacity, extra demand may mainly push up prices, causing inflation. Higher spending can also increase imports and worsen the current account, which records trade in goods and services alongside certain income flows with other countries.
The reverse can happen when a government reduces spending to bring inflation down. Weaker demand may slow price rises, but firms may cut output and jobs.
Can governments avoid the trade-off?
Sometimes they can reduce it. Training, better infrastructure or technological improvements may increase productive capacity: how much an economy can produce. That can support growth and employment without putting as much upward pressure on prices. These policies may take time to work, however, and their effects are uncertain.
Exam mistake to avoid: do not claim that reducing unemployment always causes inflation. Explain the conditions. Extra demand is more likely to raise prices when the economy has little spare capacity. A strong answer weighs that against the possible benefits for output and jobs, then reaches a judgement for the situation given.
