A-Level Economics: Macro Policy Conflicts and the Phillips Curve

Governments want strong growth, low unemployment, low and stable inflation and a sustainable balance of payments, but they rarely get all four at once. The DfE subject content asks A level students to analyse these potential policy conflicts and trade-offs, and evaluation marks in macroeconomic essays often depend on spotting them. This material trains the models and the judgements.

It starts with output gaps. You calculate a negative output gap of 3% from actual and potential GDP and link it to spare capacity, cyclical unemployment and weak inflationary pressure, then contrast it with a positive gap and overheating.

The core of the material is the Phillips curve. You explain the short-run inverse relationship between inflation and unemployment, then the monetarist, expectations-augmented argument that the long-run curve is vertical at the natural rate of unemployment (the NAIRU). A simple numerical Phillips curve shows the accelerationist mechanism step by step: pushing unemployment one point below the natural rate raises inflation from 2% to 4%, and once expectations adapt, to 6%. You distinguish movements along the short-run curve from shifts of it, using stagflation after an oil price shock as the example, and identify the supply-side policies (training, job matching, labour mobility) that lower the natural rate and move the long-run curve to the left.

The material then works through the other main conflicts: higher interest rates to cut inflation versus growth, jobs and export competitiveness; consumption-led growth versus the current account when the propensity to import is high; growth versus the environment and versus equality; and fiscal consolidation versus recovery in a recession. It closes with the view, associated with monetarist and supply-side economists, that the objectives are compatible in the long run if productive capacity grows, which gives you a ready-made evaluation point.

The material offers a 12-question quiz with explanations, a flashcard deck of key terms, a printable written sheet of eight questions with model answers (including an accelerationist calculation and an extended evaluation), and an oral exam in which an examiner questions you on trade-offs and how to reconcile them, one question at a time. The content follows the DfE subject content; for example, AQA sets out the short-run and long-run (L-shaped) Phillips curves in its section on possible conflicts between macroeconomic policy objectives.

• Calculate an output gap and relate it to unemployment and inflationary pressure
• Explain the short-run Phillips curve and the vertical long-run Phillips curve at the natural rate
• Use adaptive expectations to show why inflation accelerates below the natural rate
• Analyse stagflation and shifts of the Phillips curve after supply shocks
• Evaluate conflicts between growth, inflation, unemployment, the current account, the environment and the public finances, and ways to reconcile them

Practice material written by Zestly, based on the DfE GCE A level economics subject content (2014), 'Potential policy conflicts and trade-offs', with examples drawn from the AQA specification (possible conflicts between macroeconomic policy objectives; short-run and long-run Phillips curves). All figures in the questions are invented for practice.