Cambridge International as and a level Economics Ebook

1
Explain why a rise in unemployment may reduce 
wage demands.
2
Draw the new version of the Phillips curve suggested 
by the information in the second paragraph.
3
Discuss whether a reduction in the link between 
unemployment and infl ation will benefi t an 
economy.
268
Cambridge International A Level Economics

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The problems arising from 
conflicts between policy 
objectives
Government refl ationary fi scal and monetary policy 
measures designed to either reduce unemployment 
and/or increase the economic growth rate may, as 
indicated above, increase the rate of infl ation. Similarly, 
if a government seeks to reduce demand-pull infl ation 
by adopting defl ationary fi scal and monetary policy 
measures, it may reduce the economic growth rate and 
increase the unemployment rate. A government may 
seek to avoid these policy confl icts by introducing supply 
side policy measures that may, in the long run, reduce 
the infl ation and unemployment rates and increase the 
economic growth rate.
A confl ict may also arise between the aims of low 
infl ation and a reduction in a current account defi cit. A 
central bank may raise the rate of interest. Such a move 
will not only increase unemployment; there will also be a 
knock-on eff ect on the balance of payments position and 
the exchange rate. A rise in the interest rate is likely to 
lead to an appreciation in the exchange rate. Th
is could 
worsen the current account position but may attract hot 
money fl ows.
Th
ere may also be a confl ict between creating greater 
income equality and stimulating economic growth. 
Making income tax rates more progressive and increasing 
benefi ts to low-income groups may discourage eff ort and 
enterprise and may reduce FDI. Th
ere is, however, the 
possibility that raising the living standards of the poor 
may improve the health and education of part of the 
labour force and so raise productivity. In addition, eff ort 
and enterprise may be more infl uenced by wage rates and 
profi t levels than tax rates. Similarly, FDI may be attracted 
despite relatively high tax rates if, for instance, demand 
in the country is increasing and the country’s workers are 
becoming more skilled.
To avoid conf licts between policy objectives, a 
government may employ a separate policy measure for 
each objective. Such an approach is said to be following