A government announces that it wants faster growth, lower unemployment, stable prices and a healthier trade position. Every one of those sounds obviously desirable, and no sensible person would argue against any of them. The difficulty is that pursuing one of them hard enough tends to damage another, and no policy exists that improves all four at once. Macroeconomic policy is not a list of good intentions. It is a series of choices about which objective to sacrifice.
What governments are trying to do
Governments act in an economy in several distinct roles at once. They produce goods and services directly, running schools, hospitals and defence. They employ a large share of the workforce. They regulate the behaviour of firms, setting standards and enforcing competition. They redistribute income through taxes and benefits. And above all these, they attempt to manage the economy as a whole. It is that last role, macroeconomic management, that this note is about.
Macroeconomic aims
The main objectives a government pursues for the economy as a whole: economic growth, low unemployment, price stability, a stable balance of payments position and a fairer distribution of income.
Each aim has a reason behind it, and stating the reason rather than just the aim is what turns a list into an answer. Economic growth raises output and therefore average incomes and living standards. Low unemployment means fewer people without income and less output wasted, and it reduces the benefit bill. Price stability protects the value of money and of savings, and makes planning possible for households and firms. Balance of payments stability matters because a persistent current account deficit has to be financed by borrowing or by selling assets. Redistribution addresses the fact that a growing economy does not automatically share its gains.
Two further aims have become central. Environmental sustainability means meeting present needs without damaging the ability of future generations to meet theirs, by limiting pollution, carbon emissions and the using up of natural resources. And governments set criteria to judge whether each aim is being met: an inflation target, often around 2% a year; an unemployment rate close to the level caused only by people moving between jobs; steady growth of real GDP at a rate the economy can sustain; a current account that can be financed without difficulty; a fall in measures of inequality; and targets for cutting carbon emissions by a set date.
Questions asking for macroeconomic aims are usually worth two or four marks and want distinct aims, not one aim in four costumes. 'Low unemployment' and 'more people in work' are the same answer twice. Where the marks allow, add the reason: 'price stability, so that the value of savings is protected' is a fuller answer than 'low inflation' and often earns the second mark.
Unemployment rate = (number unemployed / labour force) x 100The labour force is those working plus those actively seeking work. People who are not looking for work, such as students, the retired and those unable to work, are outside it entirely and are not counted as unemployed. Formulae are not printed in any 9708 paper, so recall it.
Calculating an unemployment rate from population data
A country has a population of 40 million. Of these, 24 million are in the labour force and 22.2 million are employed. Calculate the number unemployed and the unemployment rate. Then explain why the rate would fall if discouraged workers stopped looking for work.
Why the aims conflict
The clearest conflict is between growth and inflation. A government stimulating the economy to raise output and cut unemployment is increasing total demand, and if the economy is already near its capacity, the extra demand pushes prices up rather than output. The second conflict runs through trade. As incomes rise, households buy more of everything, including imports, so a policy that succeeds in raising growth tends to worsen the current account. A third conflict is between growth now and growth later, since building the factories and infrastructure that raise future output means producing fewer consumer goods today.
The newest conflict is between economic growth and environmental sustainability. Producing more goods usually means using more energy and raw materials and creating more pollution and waste, so fast growth can damage the environment that future output depends on. Policies to protect the environment, such as taxes on pollution or strict rules on emissions, raise firms' costs and can slow growth in the short run. The conflict can be eased by growth that relies on cleaner technology and renewable energy, which is why governments try to make growth greener rather than simply slower.
Draw a production possibility curve with capital goods on one axis and consumer goods on the other. Mark two points, one with high consumer goods output and one with high capital goods output. Then sketch where each economy's PPC would sit several years later.
This is the growth-now-against-growth-later conflict in a single picture. The economy choosing more consumer goods enjoys higher living standards today but its curve shifts out less. The one choosing capital goods sacrifices present consumption for a larger curve later. Neither choice is wrong, which is exactly why it is a conflict rather than a mistake.
A country's unemployment rate falls from 8% to 7% while the number of people employed is unchanged. The most likely explanation is:
A government successfully raises economic growth. Which macroeconomic aim is most likely to be harmed as a result?
The objectives stated precisely
At AS the objectives need to be stated in the form governments actually use. Price stability usually means an inflation target, commonly around 2% and symmetric, so undershooting counts as a miss. Full employment does not mean zero unemployment, since frictional unemployment exists in any healthy economy where people move between jobs; it means unemployment at its natural rate. Economic growth is normally expressed as sustainable growth in real GDP, with sustainable carrying two meanings that are worth separating: growth that does not generate inflation, and growth that does not exhaust environmental resources. Balance of payments stability means a current account position that can be financed indefinitely, not necessarily a balance of zero.
Price stability protects two different values of money. The internal value of money is its purchasing power at home, the quantity of goods and services a unit of currency can buy; inflation reduces it, and deflation raises it. The external value of money is its value in terms of other currencies, which is the exchange rate. The two are linked, since a country with faster inflation than its trading partners tends to see its exchange rate fall over time, but they can move separately in the short run, for example when interest rate changes move the exchange rate without any change in domestic prices.
How pursuing growth undermines price stability
- The government uses expansionary fiscal or monetary policy to raise growth and cut unemployment.
- Aggregate demand shifts right as consumption, investment and government spending rise.
- Firms increase output to meet the extra orders, and real GDP rises.
- As output approaches capacity, spare resources become scarce and the AS curve steepens.
- Firms competing for a shrinking pool of available labour bid wages up faster than productivity is growing.
- Unit labour costs rise, so firms raise prices to protect their margins.
- The price level rises more quickly, so the inflation objective is missed even as the growth and employment objectives are met.
- If the central bank then tightens policy to restore price stability, the growth gained is partly given back.
The final step is what makes this a conflict rather than a side effect. The two objectives are not merely in tension: the instrument used to fix one actively reverses the other. AO2 is 40% of the written papers and this chain is reusable across most policy-conflict questions.
Practise this chain →Draw an AD/AS diagram with an AS curve that is flat at low output and steepens towards full capacity. Show the same rightward shift of AD twice: once starting from deep recession, once starting near capacity. Label the change in real output and in the price level in each case.
The conflict is not constant, it varies with the starting position, and this diagram shows why. In deep recession the shift is nearly all output and almost no inflation, so growth and price stability barely conflict at all. Near capacity it is nearly all price level. Candidates who say the severity of the conflict depends on the output gap, and use this to say so, are reasoning as the examiner wants.
The growth and current account conflict works through the marginal propensity to import. As national income rises, spending on imports rises with it, so a successful demand-led expansion pulls in foreign goods and worsens the trade balance. The conflict is sharper the more open the economy and the higher its import propensity, which is why small open economies feel this constraint far more acutely than large ones. Policy can attack the import side instead through protectionism or depreciation, but both carry costs of their own, and depreciation raises import prices, which feeds back into the inflation objective.
Why is the conflict between economic growth and price stability weaker in a deep recession than near full capacity?
Applied context
The period from 2021 onwards put the conflict on public display across many economies at once. Unemployment fell to historically low levels while inflation rose well above target, and central banks tightened policy knowing that doing so risked recession. The episode is useful in an answer because the policy debate was conducted openly in terms of the trade-off: how much unemployment was acceptable to bring inflation back to target, and how quickly. It also illustrates the complication that supply shocks bring, since part of the inflation came from energy and supply chains rather than from excess demand, and demand-side tightening is a poor instrument against a supply-side cause.
The second half is the more sophisticated point. When inflation is cost-push rather than demand-pull, the usual conflict framing partly breaks down, because contractionary policy then worsens output without addressing the cause.