Question 1

Does economic growth always cause inflation and a worse balance of payments?

Accepted Answer

Not necessarily. The type of growth is crucial. If growth is 'supply-side led' (i.e., the economy's productive capacity, LRAS, increases), it is possible to have non-inflationary growth. Similarly, if growth is 'export-led', it will improve the balance of payments current account while also boosting GDP. The conflict typically arises from rapid, consumption-driven growth that outpaces the supply-side of the economy.

Question 2

Is the Phillips Curve trade-off between inflation and unemployment always true?

Accepted Answer

The trade-off is primarily a short-run phenomenon. In the long run, most economists believe the Phillips Curve is vertical at the Natural Rate of Unemployment (NRU). This means that attempts to use demand-side policy to keep unemployment permanently below the NRU will only result in accelerating inflation. Furthermore, periods of 'stagflation' (high inflation and high unemployment), often caused by adverse supply shocks, demonstrate that the short-run trade-off can break down.

Question 3

Can a country have a balance of payments surplus and high unemployment at the same time?

Accepted Answer

Yes, this is possible and often occurs during a recession. When an economy is in recession, unemployment is high, and domestic demand is weak. This weakness in demand leads to a sharp fall in spending on imported goods and services. If exports do not fall by as much, the current account can move into surplus. This demonstrates the strong link between the domestic economic cycle and the external balance.

Links between macroeconomic problems and their interrelatedness

What you need to know

Links between macroeconomic problems and their interrelatedness