What are the trade-offs with other macroeconomic policy objectives of a fall in the unemployment rate?

When answering an exam question such as this it is crucial to get down the key definitions, this also helps you when it comes to structuring an answer. For example, laying out the MEPOs in the introduction would give you a clear route to answering any question like this, you go through them (stable low inflation, sound government finances, steady productivity growth etc.) and then discuss AND EVALUATE the effects the unemployment rate have on it.The most obvious place to start here would be with the inflation rate, with a simple Phillips Curve (PC) plotting unemployment against inflation. A good point of evaluation here would be to mention that the initial relationship was derived in a time of steady inflation expectations, and that in the 80s the relationship was seen to breakdown as consumers augmented their inflationary expectations. The key here is that supply side policies can shift the long run PC (or the NAIRU) inwards thus sustaining a constant level of inflation for a fall in unemployment. They key here is that ceteris paribus a trade off exists, but this may not materialise when we consider other factors.The effects of falling unemployment on other MEPOs is trivial and not as obvious as the inflation case, but one could argue that having more people in work increases tax revenue and reduces the benefits burden for the government, improving their budget balance.

Answered by Charlie S. Economics tutor

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