2.5 Economic Growth

Question 1

What is economic growth?

Answer 1

An increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS

Question 2

2 different causes of economic growth.

Answer 2

1. Increase in AD
2. Increase in LRAS

Question 3

What is actual growth?

Answer 3

Short run growth
Increases in AD
Using spare capacity to increase output of goods and services

Question 4

What is potential growth?

Answer 4

Long run
Increases in LRAS
Increase in productive capacity of the economy.

Question 5

What is a negative output gap?

Answer 5

Where actual output is less than the potential output
Deflationary gap

Question 6

What is a positive gap?

Answer 6

Where actual output is greater than the potential output.
Inflationary output

Question 7

what is the business cycle?

Answer 7

This refers to the stage of economic growth that the economy is in
The economy goes through periods of booms and busts

Question 8

Characteristics of a boom.

Answer 8

• growth faster than trend
• higher profits
• low unemployment
• higher consumer/ business confidence
• high import demands
• rising tax revenues

Question 9

Characteristics of a recession/ trough.

Answer 9

• declining AD
• higher unemployment
• sharp falls in confidence/ investment
• fall in house prices
• lower demand-pull inflation
• looser policy, lower inflation- to stimulate economy
• low import demands

Question 10

Characteristics of recovery.

Answer 10

• increased willingness to spend on expensive items
• rising consumer/business confidence
• higher investment
• looser policy to to stimulate economy

Question 11

Impacts of economic growth for consumers.

Answer 11

GOOD- increased disposable income
GOOD- higher employment
BAD- doesn’t benefit everyone
BAD- demand-pull inflation
BAD- shoe leather costs

Question 12

Impacts of economic growth for firms,

Answer 12

GOOD- more profits
GOOD- higher investment
GOOD- economies of scale
BAD- higher menu costs due to rising inflation

Question 13

Impact of economic growth for the government.

Answer 13

GOOD- government budget improves- higher fiscal dividend
BAD- may to need to increase spending on healthcare if sales of demerit goods rise

Question 14

Impact of economic growth on current and future living standards.

Answer 14

GOOD- higher investment may see the development of more green technology
GOOD- higher average wages- higher living standards
GOOD- public services will improve- government revenue will increase since business and consumers earn more so pay more taxes and so higher tax revenue earned
BAD- higher growth may lead to damage to the environment in the long run

Question 15

Costs of economic growth.

Answer 15

• income inequality
• environmental costs
• current account deficit
• inflation