1. Key Macroeconomic Policy Trade-Offs★★★☆☆⏱ 20 min
Inflation vs unemployment (short-run Phillips curve trade-off)
Economic growth vs low inflation (expansionary policy increases AD and output but raises price levels)
Economic growth vs environmental sustainability (faster output growth often increases carbon emissions and resource depletion)
Low unemployment vs equity (supply-side policies to reduce unemployment may cut welfare benefits, increasing inequality)
Short-run growth vs long-run price stability (expansionary policy can create asset bubbles that lead to future recessions)
2. Stagflation: Extreme Policy Trade-Offs★★★★☆⏱ 25 min
Stagflation, defined as simultaneous high inflation and high cyclical unemployment, is the most challenging policy scenario because no policy tool solves both problems at once. A negative aggregate supply shock (e.g. spike in oil prices, pandemic supply chain disruptions) shifts the short-run aggregate supply curve left, creating this combination.
3. Core Principles for Policy Evaluation★★★★☆⏱ 20 min
IB Economics exam questions require you to evaluate policies, which means producing a balanced judgment that accounts for trade-offs, stakeholder impacts, and context.
**Time horizon**: Does the policy work better in the short run or long run? Many supply-side policies have long lags before benefits appear.
**Stakeholder impact**: Which groups gain and which lose from the policy? For example, contractionary monetary policy benefits savers but harms borrowers and unemployed workers.
**Context dependency**: Is the policy appropriate for the specific economic context? Expansionary policy works well in a deep recession but not at full employment.
**Size of the shock**: How large is the problem the policy is addressing? Large negative output gaps require more aggressive policy than small gaps.
**Sustainability**: Does the policy create long-run problems that outweigh short-run benefits? Persistent deficit spending can lead to unsustainable debt levels.
4. Combining Policies to Mitigate Trade-Offs★★★★★⏱ 25 min
Governments can combine demand-side and supply-side policies to reduce the severity of trade-offs, rather than relying on a single policy tool. Careful policy design can minimize the unintended negative consequences of pursuing a core objective.
Common Pitfalls
Why: IB exam markers require explicit balancing of trade-offs to reach the highest mark bands for evaluation questions
Why: While policy combinations can reduce trade-off severity, they almost never eliminate all conflicts, and often create new trade-offs of their own
Why: Evaluation marks are awarded for context-dependent judgments, not generic lists of pros and cons
Why: There is no long-run trade-off between inflation and unemployment, only a short-run trade-off. Failing to make this distinction loses marks