Judging policy trade-offs
| English | 中文 | Pinyin |
|---|---|---|
| cyclical unemployment/ˈsaɪklɪkl ʌnemˈplɔɪmənt/ | 周期性失业 | zhōu qī xìng shī yè |
| policy trade-off/ˈpɒlɪsi treɪd ɒf/ | 政策权衡 | zhèng cè quán héng |
A decision you can investigate
- A town wants jobs, stable prices and cleaner air. A new factory may help one aim while harming another.
- A useful policy judgement explains the conditions, affected groups and period.
Build the explanation
- Demand stimulus may reduce cyclical unemployment 周期性失业 but raise inflation near capacity. Growth can raise prices if demand outruns output, while capacity-building growth can reduce that pressure.
- Higher output can create pollution unless production becomes cleaner. Restricting harmful activity can protect the environment but reduce some jobs or output. Domestic inflation above foreign inflation can reduce export competitiveness and worsen the current account, other factors unchanged.
Work through the evidence
- Fictional policy A raises demand when factories have idle capacity: output and employment can rise with less price pressure. Policy B raises the same demand when factories are fully used: price pressure is more likely.
- An energy-efficiency programme may lower emissions per unit and costs, easing the growth/environment conflict. But total emissions can still rise if output grows faster than emissions per unit fall.
Which condition reduces inflation risk from demand stimulus?
Available capacity allows more output to meet demand.
Test the limits
- Do not treat every conflict as inevitable. Time matters: spending on training is demand now and possible capacity later. Foreign demand, exchange rates and inflation abroad also influence the current account.
- A judgement should name the priority, explain a mechanism, identify a cost and state a condition under which the policy works better than an alternative.
What can ease the growth/environment conflict?
Cleaner methods can reduce damage, although total output still matters.
Falling pollution per unit guarantees falling total pollution.
Output can grow enough to offset the improvement per unit.
Apply and explain your answer
- Why does spare capacity change the inflation risk of demand stimulus?
- Firms can expand output using idle resources instead of responding mainly with higher prices.
Why can relatively high domestic inflation affect the current account?
Relative export/import prices affect demand and trade values.
Use the terms precisely
- policy trade-off 政策权衡: Improvement in one objective can impose a cost on another.
- cyclical unemployment: Unemployment caused by weak demand during an economic downturn.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Fictional policy A raises demand when factories have idle capacity: output and employment can rise with less price pressure. Policy B raises the same demand when factories are fully used: price pressure is more likely. An energy-efficiency programme may lower emissions per unit and costs, easing the growth/environment conflict. But total emissions can still rise if output grows faster than emissions per unit fall.
Do not treat every conflict as inevitable. Time matters: spending on training is demand now and possible capacity later. Foreign demand, exchange rates and inflation abroad also influence the current account. A judgement should name the priority, explain a mechanism, identify a cost and state a condition under which the policy works better than an alternative.
Demand stimulus may reduce cyclical unemployment but raise inflation near capacity. Growth can raise prices if demand outruns output, while capacity-building growth can reduce that pressure.