A government wants growth, full employment, low inflation, a sustainable environment, fair incomes and manageable debt. The awkward truth is that pushing hard on any one of those usually pushes another one backwards. This page is really a page about evaluation — it is where the top marks in Paper 1 essays live.
📚 What you need to know
Macroeconomic objectives regularly conflict: achieving one comes at the cost of another.
The classic conflict is low unemployment versus low inflation, shown by the short-run Phillips curve (SRPC).
The long-run Phillips curve (LRPC) is vertical at the natural rate of unemployment: in the long run there is no trade-off.
Other conflicts: growth versus the environment, growth versus equity, growth versus the current account, and low debt versus everything else.
Trade-offs are short-run phenomena. Supply-side improvements can relax them, because they raise output without raising prices.
The strength of a conflict depends on where the economy is: near full employment the trade-offs bite hard; deep in a recession they barely bite at all.
Unemployment versus inflation in the short run
Start with what you already know. A rise in AD raises output, so firms hire and unemployment falls. But the same rise in AD pulls the price level up. Falling unemployment and rising inflation arrive together. Plot one against the other over many years and you get a downward-sloping curve.
At A, unemployment is 5% and inflation 2%. Boosting AD moves the economy to B: unemployment 3%, inflation 5%. The government chose lower unemployment and paid for it in prices.
The Phillips curve is not a separate theory you have to memorise. It is the AD/AS diagram rewritten. A rightward AD shift raises the price level (inflation up) and raises output (unemployment down). That is one point on the curve. Draw the AD/AS version in rough first if the curve confuses you.
Why the trade-off disappears in the long run
The trade-off works because workers are fooled for a while. Prices rise before wages do, so real wages fall, so firms find labour cheap and hire more people. But workers notice. At the next pay round they demand wages that restore their real income. Firms’ costs rise, so they let the extra workers go, and unemployment returns to its natural rate — only now with permanently higher inflation.
A to B is the short-run gain. B to C is the long-run correction. The economy ends up back at 5% unemployment with 5% inflation instead of 2% — worse off overall.
The policy conclusion. If the LRPC is vertical, demand-side policy cannot permanently cut unemployment below the natural rate. The only way to lower unemployment for good is to shift the LRPC left using supply-side policy: retraining, better job matching, improved education and mobility.
The other conflicts
Conflict
The chain of reasoning
What relaxes it
Growth and inflation
Higher AD moves the economy towards full employment, remaining resources become scarce, firms bid up wages and input prices, so inflation rises above target
Growth driven by rising LRAS rather than AD: output rises without price pressure
Growth and the environment
More output means more production and consumption externalities, more emissions and faster depletion of non-renewable resources
Green technology, carbon pricing and regulation, so growth becomes less resource-intensive
Growth and equity
Returns to capital and to high skills often rise faster than average wages, so the income gap widens even as everyone’s income rises
Progressive taxation, transfer payments and investment in education
Low unemployment and low inflation
As the economy approaches full employment, labour becomes scarce and workers can negotiate higher wages, feeding into prices
Higher productivity, so unit labour costs stay flat even when wages rise
Growth and the current account
Rising incomes raise demand for imports, so the trade balance worsens as the economy grows
Improved international competitiveness through quality and cost
Low debt and everything else
Cutting the deficit means less government spending or higher taxes, both of which reduce AD, growth and employment
Growing the economy so the debt-to-GDP ratio falls without cutting spending
How hard a trade-off bites depends on where you are
This is the single most useful evaluation move on the whole topic. The same policy has very different side effects depending on the state of the economy.
Deep in a recession, with a large negative output gap, SRAS is nearly flat. Boosting AD raises output a lot and prices barely at all, so the growth-inflation conflict is weak.
Close to full employment, SRAS is steep. The same boost to AD raises prices a lot and output barely at all, so the conflict is severe.
With spare capacity and rising productivity, a country can enjoy growth, falling unemployment and stable prices at once — the conflicts are not laws of nature.
WORKED EXAMPLE
Explain, using the steps in the process, why a government pursuing faster economic growth may find inflation rising above its target. [4]
Step 1: the policy and its first effect
Expansionary fiscal or monetary policy raises consumption and investment, so AD shifts right.
Step 2: what happens to spare capacity
Output rises towards the full-employment level, so unemployed labour and idle capital get used up.
Step 3: the price mechanism
Remaining resources become scarce. Workers can negotiate higher wages and suppliers raise input prices.
Step 4: the outcomeHigher costs and stronger demand together push the average price level upDemand-pull inflation rises above the 2% targetEvery link is a mark. Do not jump from “growth rises” straight to “inflation rises”.
WORKED EXAMPLE
Evaluate the claim that a government must always accept higher inflation in order to reduce unemployment. [8-style plan]
Argue for
In the short run the SRPC slopes downwards; cutting unemployment means moving up the curve to higher inflation.
Argue against 1: the long run
The LRPC is vertical at the NRU, so the gain is temporary and only the inflation is permanent.
Argue against 2: supply-side routes
Retraining and better job matching reduce structural unemployment and shift the LRPC left with no price pressure.
Argue against 3: it depends on the output gap
With a large negative output gap, AD can rise a long way before prices move much.
Judgement: true in the short run, false as a general ruleFinish with a condition: it depends on how close the economy is to full employment and on the type of unemployment being tackled.
💡 Exam tip
Name the conflict, then explain the mechanism step by step. Naming alone is a Level 1 answer.
Distinguish short run from long run in every trade-off answer — it is the fastest route to evaluation marks.
Label the Phillips diagram fully: inflation rate on the vertical axis, unemployment rate on the horizontal axis, both in per cent.
The LRPC must be vertical and sit at the NRU. A sloped “long-run” curve loses the point entirely.
Use “it depends on the size of the output gap” as your standard qualifier for growth-versus-inflation questions.
Supply-side policy is the standard way out of a trade-off — but say that it is slow, expensive and uncertain, or you have only made half the argument.
⚠ Common mix-up
Drawing the LRPC sloping. It is vertical, because in the long run inflation has no effect on real variables.
Confusing a movement along the SRPC with a shift of it. Changes in AD move you along; changes in expected inflation shift the whole curve.
Putting the price level on the Phillips curve axis. It is the inflation rate, not the level.
Assuming every objective conflicts with every other. Falling unemployment usually raises growth and cuts the deficit — those objectives agree.
Presenting the natural rate as unchangeable. Supply-side policy can and does shift it.
Writing one-sided evaluation. A conflict question needs both the mechanism and the conditions under which the conflict weakens.
Up next: Equality, Equity and Economic Inequality — we move from 3.3 into 3.4, and from how big the pie is to how it gets shared out.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
