3.3 Macroeconomic objectives

• Short-term growth includes actual growth in the PPC model and AD-driven increases in real output • Long-term growth includes outward PPC shifts and LRAS-driven increases in full employment output • Economic growth is measured using growth rates • Diagram: PPC showing actual growth and growth in production possibilities • Diagram: AD increase showing higher real output • Diagram: LRAS increase showing higher full employment output • Calculation: economic growth rate from data

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• Growth can affect living standards, the environment, and income distribution • Evaluation requires weighing benefits against costs and sustainability concerns

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• Unemployment rate measures unemployment relative to the labour force • Measuring unemployment can be difficult • Causes include cyclical, structural, seasonal, and frictional unemployment • Natural unemployment is the sum of structural, seasonal, and frictional unemployment • Costs include personal, social, and economic costs • Calculation: unemployment rate from data • Diagram: minimum wage causing unemployment • Diagram: fall in demand for labour in a market or region • Diagram: deflationary gap showing cyclical unemployment

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• Inflation is measured using CPI data • CPI has limitations as an inflation measure • Inflation can be demand-pull or cost-push • High inflation creates uncertainty, redistributive effects, saving effects, export competitiveness damage, lower growth, and inefficient allocation • Calculation: inflation rate from weighted CPI data • Diagram: demand-pull inflation • Diagram: cost-push inflation

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• A weighted price index uses quantities purchased as CPI weights • Calculation [HL]: weighted price index from data

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• Deflation can be caused by changes in AD or SRAS • Disinflation is a fall in the inflation rate; deflation is a fall in the price level • Deflation costs include uncertainty, redistributive effects, deferred consumption, cyclical unemployment, bankruptcies, higher real debt, inefficient allocation, and policy ineffectiveness • Diagram: deflation

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• Policymakers compare the relative costs of unemployment and inflation • Trade-offs may appear between low unemployment and low inflation

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• Government debt is measured as a percentage of GDP • Budget deficits add to government debt • High debt can create debt servicing costs, credit rating issues, and future tax or spending pressures

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• The short-run Phillips curve shows a trade-off between inflation and unemployment • The long-run Phillips curve shows the long-run relationship between inflation and unemployment • Diagram [HL]: AD/AS curves for unemployment-inflation trade-off • Diagram [HL]: short-run and long-run Phillips curve

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• High economic growth may conflict with low inflation • High growth may conflict with environmental sustainability • High growth may conflict with equity in income distribution

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