ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A country has low inflation and a large trade surplus, but unemployment is high. The government cuts income tax and increases spending on public works. Which statement best describes the possible conflict between macroeconomic objectives resulting from this policy?
Lower unemployment may be achieved, but at the cost of higher inflation and a weaker trade position. Tax cuts and public spending are expansionary fiscal policy that boost demand, which can pull up prices and raise imports as incomes rise, so objectives can conflict.
- ALower unemployment may be achieved but at the cost of higher inflation and a weaker balance of payments through increased importsCorrect
- BLower unemployment will necessarily also reduce inflation and increase the trade surplus
- CIncreased demand will reduce imports because consumers will prefer domestic goods
- DThe policy is monetary policy and will have no effect on the trade balance
Explanation
This is expansionary fiscal policy. Higher demand should reduce unemployment, but it can create demand-pull inflation and draw in imports as incomes rise, worsening the trade balance. Lower unemployment does not necessarily reduce inflation, and the policy is fiscal, not monetary.
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