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Government Aims and Fiscal Policy: Question 6

Syllabus 4.1

Multiple choice 1 mark

In Bellmoor, real GDP grew by 8% a year for three consecutive years, driven mainly by rapid expansion of heavy manufacturing and construction. Over the same period, factory emissions rose sharply, several forests near the industrial belt were cleared to make way for new factory sites, and air quality in nearby towns worsened noticeably.

Which pair of the government's macroeconomic aims does this situation best illustrate as being in conflict?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the macroeconomic aims and the conflicts between them

Governments generally pursue six macroeconomic aims: economic growth, full employment (low unemployment), stable prices (low inflation), balance of payments stability, a fairer distribution (redistribution) of income, and environmental sustainability. Three conflicts between these aims come up especially often:

  • Economic growth and environmental sustainability
  • Full employment and stable prices
  • Full employment and balance of payments stability

Step 2: Match the scenario to a conflict

In Bellmoor:

  • Real GDP grew by 8% a year for three years, driven by manufacturing and construction. A sign the government’s economic growth aim was being strongly achieved.
  • That same expansion raised factory emissions, led to deforestation for new sites, and worsened local air quality, undermining the environmental sustainability aim.

This is the classic mechanism behind the conflict between economic growth and environmental sustainability: pushing hard for faster output growth, especially from manufacturing and construction, tends to increase resource use, pollution and environmental damage.

Step 3: Why the other options are wrong

  • A: no information is given about unemployment, wages or the general price level, so full employment and stable prices cannot be assessed from this scenario.
  • C: no data on trade, exports, imports, or how income is shared between groups is given.
  • D: the scenario is about output growth and environmental damage, not about the labour market or the balance of payments.

Final answer

The scenario best illustrates a conflict between economic growth and environmental sustainability, option B.