The macroeconomic aims of government — common mistakes

When discussing economic growth, always distinguish between short-run (actual) growth caused by shifts in AD, and long-run (potential) growth caused by shifts in LRAS. This distinction is crucial for analysing the impact on inflation.

Use the Phillips Curve diagram to illustrate the trade-off. For evaluation, challenge the stability of the short-run trade-off by introducing the concept of the vertical long-run Phillips curve and the role of expectations.

No, this is a common misconception. Full employment does not mean zero unemployment. It refers to a situation where cyclical (demand-deficient) unemployment is zero. The economy is considered to be at full employment when the only unemployment remaining is frictional, structural, and seasonal. This level is known as the Natural Rate of Unemployment (NRU).

Not necessarily. While a surplus is often seen as preferable to a deficit, a large and persistent current account surplus can be problematic. It may indicate weak domestic demand and over-reliance on exports, making the economy vulnerable to global downturns. It can also lead to protectionist reactions from trading partners who are running corresponding deficits. The objective is 'balance' or 'stability', not necessarily a large surplus.

While trade-offs are common, the objectives are not always in conflict. There can be compatibility, especially through the use of supply-side policies. For instance, policies that improve labour market flexibility can reduce the natural rate of unemployment while also increasing the economy's productive potential (sustainable growth). Similarly, investment in green technology can promote growth while also meeting environmental objectives. The key is the type of policy used.