Discuss whether managing conflicting economic objectives is the key consideration for governments when dealing with stagflation.
b. Discuss whether managing conflicting economic objectives is the key consideration for governments when dealing with stagflation. [15]
Introduction
Stagflation—where an economy simultaneously experiences stagnant or negative economic growth alongside rising inflation—presents one of the most challenging policy dilemmas for governments. Unlike typical demand-side problems, stagflation stems from both weak aggregate demand and adverse supply-side shocks, such as rising input costs or supply chain disruptions. This creates conflicting economic objectives, as policies that boost growth often worsen inflation, and vice versa. While managing these conflicts is undoubtedly a key consideration, it is not the only factor shaping government decisions. The root causes of stagflation and the structure of the economy also significantly influence policy choices.
Managing Conflicting Economic Objectives
At the core of the stagflation dilemma is the incompatibility of standard macroeconomic goals—low inflation and high economic growth. Typically, governments might use expansionary demand management policies to combat stagnation. For instance:
The central bank may pursue expansionary monetary policy by increasing the money supply, which reduces interest rates.
Lower interest rates make borrowing cheaper and reduce the opportunity cost of spending, encouraging consumers to purchase durable goods and businesses to invest more, especially where investment is interest-elastic (as explained by the Marginal Efficiency of Investment, or MEI).
This leads to an increase in aggregate demand (AD), shifting the AD curve rightward, resulting in higher real national income and a reduction in cyclical unemployment.
However, if the economy is already operating at or near full employment, the increase in AD may lead primarily to a rise in the general price level (GPL), fuelling demand-pull inflation. In other words, while the policy may address the “stagnation” component of stagflation, it exacerbates the inflationary problem, creating a policy trade-off.
Thus, the conflict between stabilising prices and promoting growth is central to the policy debate, and managing this trade-off becomes a primary concern for governments.
Understanding the Nature of the causes of stagnation
While conflicting goals are important, the underlying causes of stagflation play a critical role in determining the appropriate policy response.
If stagflation is driven primarily by supply-side constraints—such as a shortage of skilled labour, rising energy prices, or disrupted logistics—then using demand-side tools alone may be ineffective or even counterproductive. In such cases, supply-side policies are more suitable.
For example:
The government could implement tax incentives or subsidies to encourage labour force participation among older workers or caregivers.
Grants for firms to adopt automation could raise productivity, easing supply constraints and shifting the Short-Run Aggregate Supply (SRAS) and Long-Run Aggregate Supply (LRAS) curves rightward.
These policies not only address the cost-push inflation arising from supply bottlenecks but also contribute to potential growth, reducing the risk of inflation in the long term without worsening unemployment.
Hence, understanding whether stagflation stems from cost-push factors (e.g. rising oil prices, supply chain shocks) or structural weaknesses is essential. A misdiagnosis could lead to poor policy choices—such as expanding demand in an inflationary context—making things worse.
The Structure of the Economy
In addition to policy trade-offs and the nature of the causes, the structure of the economy matters when selecting policy tools.
In export-oriented economies such as Singapore, boosting domestic demand may not be enough to reignite growth. In such cases, governments might look toward exchange rate policy to manage the trade balance and stimulate external demand.
A depreciation of the exchange rate makes exports cheaper and imports more expensive. This can boost (X – M), increasing AD and supporting growth. However, it can also worsen imported inflation, particularly if the country depends heavily on imported essentials such as food, fuel, or intermediate goods.
Conversely, an appreciation of the exchange rate reduces imported inflation by lowering the cost of foreign goods, helping contain inflation. But it simultaneously makes exports more expensive, reducing export competitiveness and potentially leading to slower growth and higher unemployment in export-reliant industries.
This creates another trade-off between external competitiveness and price stability, and governments must evaluate the import-intensity of consumption and production in their economy before deciding which way to lean.
Conclusion
To conclude, managing conflicting macroeconomic objectives—balancing growth and inflation—is undoubtedly a key consideration for governments facing stagflation. The simultaneous pursuit of low inflation and high growth is especially difficult when traditional tools for addressing one problem worsen the other.
However, it is not the only factor. The underlying causes of stagflation, such as supply-side constraints versus demand weakness, and the economic structure, particularly trade-dependence and import reliance, are also crucial. Governments that understand the specific context of stagflation within their economy—rather than applying generic responses—are better equipped to implement policies that restore both stability and growth over the medium to long term.
🚀 ETGexpedite — The JC1 Economics Revision Programme That Works
📘 Reading model essays is useful. But writing your own — with structure, clarity, and confidence — is how you score.
At Economics at Tuitiongenius (ETG) — Singapore’s leading economics tuition centre — we don’t just teach content. We train students to think critically, structure better, and write like top scorers. With ETGexpedite, our flagship JC1 economics tuition programme, you’ll walk into Promos fully prepared — not panicked.
🎯 What Makes ETGexpedite Different?
Whether you’re aiming for your first L3 or just need more clarity before exams, this H2 economics tuition programme gives you the structure, feedback, and support you’ve been missing.
✅ You’ll Get:
26 Recorded Lessons — Binge at your pace, review on demand
Weekly Live Classes — Available at Coronation Plaza, Bedok, or via Zoom
4 Graded Mock Promos — With in-depth feedback to refine your performance
Access to Full Resources — Textbooks, model essays, Micro Masterclass Shorts, and consults
🎁 Bonus: FREE access to the JC2 Headstart Programme (worth $1,600)
💬 “ETG is damn good… probably one of the best tuition I attend.”
– Dylan Tan, Top Scorer, RI JC1 Promos
💡 Perfect For:
JC1 students who want to master L3 writing
Those struggling with time management or CSQ structure
Anyone searching for JC economics tuition or economics tuition Singapore with proven results
🔗 Register now at tuitiongenius.com/expedite
📲 Or WhatsApp us at 8168 3986 — and get started instantly
Don’t study harder. Study smarter — with ETG Economics behind you.