Links between macroeconomic problems and their interrelatedness — common mistakes

When analysing the Phillips Curve, always specify whether you are discussing the short run or the long run. To earn higher marks, support your explanation by showing how a rightward shift in the AD curve leads to a movement up along the Short-Run Aggregate Supply (SRAS) curve, causing higher prices and lower unemployment, which corresponds to a movement along the Short-Run Phillips Curve.

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.

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.

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.