2.5 Economic Growth

Question 1

Define economic growth

Answer 1

The expansion of the productive potential of the economy

Question 2

What are the causes of economic growth? (4)

Answer 2

• an increase in the quantity or quality (productivity) of the factors of production
• technological progress
• improved efficiency (less resources needed to produce each good)
• international trade

Question 3

How is short-run economic growth shown on a PPF?

Answer 3

An inc. from a point inside the curve to a point on the curve, showing the economy using up spare capacity and full employment of resources

Question 4

How is long-run economic growth shown on a PPF?

Answer 4

An outward shift of the PPF, showing an increase in the potential output of the economy

Question 5

Define short-run economic growth (actual growth)

Answer 5

The percentage increase in a country’s real GDP

Question 6

What is short-run economic growth caused by?

Answer 6

An increase in any of the components of AD or a decrease in costs of production and increase in productivity (inc. in SRAS)

E.g. weaker exch. rate, lower int. rates, higher govt. spending, higher cons./business confidence, lower inc./corporation tax

Question 7

Define long-run economic growth (potential growth)

Answer 7

The long-run expansion of the productive potential of an economy

Question 8

What is long-run economic growth caused by?

Answer 8

An increase in the productive capacity/potential of the economy or an increase in the quality (productivity) and quantity of the factors of production (LRAS)

E.g. new resource discoveries, infrastructure improvements, inc. labour prod. inc. in workforce size, investment, inc. in competition

Question 9

How is short-run economic growth shown on a classical AD/AS diagram?

Answer 9

An outwards shift in the AD or SRAS curves

Question 10

How is long-run economic growth shown on a classical AD/AS diagram?

Answer 10

A rightwards/outwards shift in the LRAS curve

Question 11

What is an output gap?

Answer 11

An output gap is the difference between actual growth and trend (potential) growth within the economy

Question 12

When does a positive output gap occur?

Answer 12

Y1>YFe:
Business cycle: when the actual rate of economic growth in the economy is greater than the economy’s potential growth rate (occurs during a boom)

AD/AS diagram: when the actual level of output is greater than the potential level of output

Question 13

When does a negative output gap occur?

Answer 13

Y1<YFe:
Business cycle: when the actual rate of economic growth in the economy is less than economy’s potential growth rate (occurs during recession)

AD/AS diagram: when the actual level of output is less than the potential level of output

Question 14

What causes a positive output gap?

Answer 14

An increase in AD or SRAS

Question 15

What causes a negative output gap?

Answer 15

A decrease in AD or SRAS

Question 16

What are the features of a positive output gap/boom? (relation to macroeconomic objectives)

Answer 16

• rising inflation rates
• lower unemployment rates
• a worsened trade balance
• improved government budget (rev.)
• harm to the environment
• inc. in economic growth
• worsened distribution of income and wealth (inequality)

Question 17

What are the features of a negative output gap/recession? (relation to macroeconomic objectives)

Answer 17

• falling inflation rates
• higher unemployment rates
• a better trade balance
• worsened government budget
• fewer environmental problems
• negative economic growth (slower)

Question 18

Stages of the business cycle

Answer 18

• boom
• peak
• recession
• trough
• recovery

Question 19

What does the business cycle show?

Answer 19

Fluctuations of actual growth of an economy over time

Question 20

Boom

Answer 20

When an economy is growing quickly (AD rising)

Question 21

Recession

Answer 21

When there is negative economic growth for at least two consecutive quarters (AD falling)

Question 22

Recovery

Answer 22

The economy begins to grow again (AD rising)