9708 · 10.2
Links between macroeconomic problems and their interrelatedness flashcards
Revision flashcards for Cambridge 9708 Links between macroeconomic problems and their interrelatedness (syllabus 10.2). Flip, recall, then mark a real past-paper question.
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What is stagflation?
Rising unemployment AND rising inflation simultaneously — breaks the simple Phillips trade-off; usually caused by adverse supply shocks.
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Demand-pull inflation link to unemployment?
Strong AD → low cyclical unemployment but inflation if Y > Yf — short-run Phillips trade-off.
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Cost-push inflation mechanism?
SRAS shifts left (e.g. oil shock, wage push) → higher price level AND lower output → unemployment rises with inflation.
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Higher interest rates — spillover effects?
↓ AD → slower growth, ↑ unemployment; ↑ currency → ↓ exports, BOP may worsen; ↓ inflation.
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Crowding out?
Expansionary fiscal policy raises G → higher borrowing → interest rates rise → private I falls — offsets some AD boost.
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Growth vs environment interlink?
Rapid GDP growth may increase negative externalities — sustainability conflict with growth objective.
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What is the short-run Phillips Curve relationship?
An inverse relationship between the rate of inflation and the rate of unemployment. Lower unemployment is associated with higher inflation, and vice versa.
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How can rapid economic growth worsen the balance of payments current account?
Rising national income leads to increased spending on imports (a high marginal propensity to import). If import growth exceeds export growth, the current account deficit widens.
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Explain the conflict between controlling inflation and reducing unemployment.
Policies to reduce unemployment (e.g., lower interest rates) are expansionary, increasing AD and risking demand-pull inflation. Policies to control inflation (e.g., higher interest rates) are contractionary, reducing AD and risking higher cyclical unemployment. This is the classic Phillips Curve trade-off.
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How does a high domestic inflation rate affect the current account?
It makes exports more expensive and less competitive, while making imports relatively cheaper. This tends to decrease export revenue and increase import expenditure, worsening the current account balance.
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What is a 'stop-go' policy cycle?
A cycle where a government alternates between expansionary ('go') policies to boost growth/reduce unemployment and contractionary ('stop') policies to control the resulting inflation and balance of payments deficits.
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How does a central bank raising interest rates affect the balance of payments?
It causes a financial account surplus due to 'hot money' inflows, leading to exchange rate appreciation. This appreciation can worsen the current account by making exports less competitive. However, the resulting domestic slowdown may reduce import demand, which improves the current account. The overall effect is complex.