2.5 and 2.6 lesson

Question 1

What are the two types of economic growth?

How are both caused?

Answer 1

Actual growth = measured by an increase in GDP over time.
By an increase in AS and increase in AD.

Potential growth = measured by the “trend’ or average rate of growth over a time period,
You can cause this by increasing productive potential in an economy.

Question 2

What diagram would an actual growth have?

Answer 2

It would have a similar to a trade cycle.

Question 3

What diagram would a long run growth have?

Answer 3

would have a straight line.

Question 4

What is export led growth?

What factors affect exports?

Answer 4

When the shift in AS is caused by the X component of AS increasing.

Exchange rates, competitiveness, economic cycle, state of other economies.

Question 5

Draw a diagram of potential economic growth.

Answer 5

Two vertical LRAS

With demand curve intersecting.

Question 6

What impacts productive potential?

Name one thing that impacts quantity or quality.

Answer 6

Anything that changes the quality or quantity of labour.

Land- Quality= Fertilisers
Quantity= fracking

Labour (quality) = higher levels of education
quantity= more immigration
Capital- Quality- research and development.
quantity (more machinery)

Question 7

What is actual GDP? what is the symbol for it.

Answer 7

Actual GDP is what the economy has actually produced (Y).

Question 8

What is potential GDP? What is the symbol for it? (Y*)

Answer 8

Potential GDP is how much the economy could produce if all resources are allocated fully and efficiently at the normal levels of utilisation.

Question 9

What is an output gap?

Answer 9

Output gap measures the difference between the actual level of output and what could have been produced if the economy had been at full capacity.

Question 10

What is the formula for an output gap?

Answer 10

Y (actual GDP) - Y* (potential GDP).

Question 11

What are the types of output gaps and how are they shown on an actual and potential growth diagram?

Answer 11

Inflationary gaps are shown by the peaks of the actual GDP curve.
Recessionary gaps are shown by the peaks of the trend growth gaps.

Question 12

What are the consequences of a negative output gap? (5)

Answer 12

1- Unemployment - spare capacity exits in the economy.

2- Real GDP below potential level

3- If negative output gap is widening then confidence my be low.

4- Budget deficit- Government spending.

5- Current account may improve as less spent on imports.

Question 13

What are the benefits of growth?

What are the different groups

Answer 13

CONSUMERS– (Increase in living standards)
(Reduce unemployment)

FIRMS– (Increase in investment and confidence)
(Increased profit)

GOVERNMENT– (increase tax revenues)

Question 14

What are the long term benefits of growth?

Answer 14

If growth is driven by technological change change can be environmentally friendly and sustainable.

Question 15

What are the negative impacts of economic growth?

Answer 15

1. Inflation
2. Environment (Negative externalities, Depletion of natural resources, waste.)
3. Income inequality
4. Balance of payments will increase causing trade deficit.

Question 16

Why might growth not be sustainable?

Answer 16

• depletion of non-renewable resources

- environment threats such as flooding and droughts.

Question 17

What are the 3 other macroeconomic objectives.

Answer 17

• Balanced government budget
• Protection of the environment
• Greater income inequality

Question 18

What are basic economic objectives?

Answer 18

Economic growth
Inflation
Unemployment rates
Balance of payments

Question 19

What is a government budget?
How is a deficit financed?
What is all the debt?
Why is it important?

Answer 19

In a balanced budget taxation = gov spending.

If government spending is greater than taxation there is a deficit.
A deficit is financed by gov bonds. These are repaid plus a “coupon” is repaid at the end.

All the debt is called government debt.

It is important as a fiscally prudent budget increases consumer confidence and overseas investors.

Question 20

How is the protection of the environment an objective?

What examples are of this?

Answer 20

Countries have international agreements like the Paris agreement.
Countries have to propose actions they will propose to reduce climate change.

Some targets are clean air, clean water and to protect live stock.

Question 21

Why is greater income equality an objective?

Answer 21

Too much inequality creates instability causes civil war, mental health issues, petty crime.

Also reduced happiness and living standards.

Question 22

What are two examples of demand side policies?

Answer 22

Monetary policy and government policy

Question 23

What is the monetary policy?

Answer 23

It is dictated by the Bank of England.

Set out interest rates, money supply and exchange rates.

Question 24

What is the government fiscal policy?

Answer 24

Government spending and taxation.

Question 25

What is the transmission mechanism?

Answer 25

Interest rates rise,
Cost of borrowing increases, reward for borrowing decreases and existing debt increases.
Consumption and investment fall
Ad falls
Inflationary pressure falls.