3. Economic Issues - Economic Growth

Question 1

Economic Growth refers to…

Answer 1

an increase in a country’s productive capacity, as measured by an increase in real GDP

Question 2

Real GDP is…

Answer 2

an increase in national output adjusted for inflation.

Question 3

Circular flow of income (see note word doc.)

Answer 3

…

Question 4

Y (disposable income) = …

Answer 4

C (consumption) + S (savings)

Question 5

MPS (marginal propensity to save) = …

Answer 5

ΔY(change in income) / ΔS (divided by change in savings)

Question 6

Aggregate demand (AD) = …

Answer 6

aggregate supply (AS) (equilibrium)

Question 7

S (savings) + T (taxes) + M (imports) = …

Answer 7

I (investments) + G (government spending) + X (exports)

Question 8

C (total consumption) = …

Answer 8

Co+cY (total consumption = autonomous consumption + MPC x Y) Consumption Function

Question 9

Y (total income) = …

Answer 9

= C + I + (G-T) + (X-T) (Y = total income, C = consumption expenditure; G = government expenditure; I = investment expenditure, X = exports and M = imports)

Question 10

I, G & X = …

Answer 10

Io, Go & Xo (they are autonomous)

Question 11

M = …

Answer 11

M = Mo + mY (m is the marginal propensity to spend on imports)

Question 12

MPC + MPS & APC + APS = …

Answer 12

1

Question 13

Simple multiplier (k) = …

Answer 13

1 / 1 - MPC or k = 1 / MPS

Question 14

Relationship between MPC, MPS & multiplier

Answer 14

1. If the MPC is larger, then the MPS must be smaller. As a result, the multiplier is larger
2. If the MPC is smaller, then the MPS must be larger. As a result, the multiplier is smaller

Question 15

Measurement of economic growth formula (Real GDP)

Answer 15

generally measured in the CHANGES in real GDP. (Nominal GDP x 100/CPI)

Question 16

Calculating economic growth (Growth Rate of Real GDP)

Answer 16

(Current GDP - Previous GDP) / Previous GDP x 100

Question 17

Sources of economic growth

Answer 17

Stems from the main sources of aggregate demand. (C + I + G + X – M)

Question 18

Consumption spending (C) is.. (influence)

Answer 18

mainly influenced by expendable income and consumer confidence. These factors are influenced by the level of taxation, wages and interest rates.

Question 19

Investment spending (I) is… (influence)

Answer 19

investment spending by firms is influenced by profits, interest rates, taxation and expectations about the economy.

Question 20

Govt. Spending (G) is… (influence)

Answer 20

largely influenced by amount of tax revenue, budget priorities and state of the economy.

Question 21

Effect of economic growth on GDP per capita and living standards

Answer 21

Increased use of resources and production possibility increases incomes. Higher incomes allows greater purchasing power and ability to improve standards.

Question 22

Effect of economic growth on Savings

Answer 22

Higher economic growth encourages higher levels of savings. Increased incomes allows private individuals to reduce debt and save.

Question 23

Effect of economic growth on productivity and technology

Answer 23

EG often arises from increases in productivity and efficiency. Efficiency gains can be made by technological progress (cost reducing technology) or increases to labour productivity.

Question 24

Effect of economic growth on Employment

Answer 24

increases employment and reducing unemployment. Encourages higher labour force participation.

Question 25

Effect of economic growth on Business investment

Answer 25

Higher consumption achieved through EG can greatly encourage businesses to expand

Question 26

Effect of economic growth on Exports

Answer 26

Economic growth leads to increased output, leading to higher exports. Export income can be used to fund imports.

Question 27

Cost of economic growth in Environment

Answer 27

pursuing higher economic growth can lead to damage to the environment.

Question 28

Cost of economic growth in structural unemployment

Answer 28

Technological change = structural unemployment. Governments will need to increase spending on retraining and education.

Question 29

Cost of economic growth in Consumerism and Materialism

Answer 29

adversely affects traditional and family values

Question 30

Cost of economic growth in income inequality

Answer 30

occurs if the benefits of economic growth do not “trickle down” to the lower and middle classes.

Question 31

Cost of economic growth on inflation

Answer 31

Higher demand for limited resources leads to DEMAND-PULL inflation. Can also lead to increased costs for businesses and cause COST-PUSH inflation. Increased spending on imports could lead to a deficit on the current account.

Question 32

Increase in Agg. Supply occurs as a result of economic growth because...

Answer 32

In the long run, economic growth is heavily impacted by a country’s PRODUCTIVE CAPACITY.

Question 33

Aggregate supply (AS) is... (also what does a shift in the right mean)

Answer 33

the total output in the economy. A shift to the right in the AS represents an increase in the Total Output.

Question 34

When AS=AD, equilibrium is achieved. If AD increases and AS doesnt change...

Answer 34

prices will increase (inflation). This will restrict future growth.

Question 35

Types of efficiency

Answer 35

Technical / Allocative / Dynamic

Question 36

Technical (productive) Efficiency

Answer 36

when businesses produce output using the least cost combination of resources. In microeconomics, this means a business has achieved technical optimum. (economies of scale)

Question 37

Allocative efficiency

Answer 37

when firms change prices to reflect the marginal cost of production so that prices reflect consumer preferences.

Question 38

Dynamic efficiency

Answer 38

when firms adapt to changing economic conditions by using cost-reducing technology.

Question 39

Trends in labour productivity

Answer 39

Australian growth in GDP per capita has risen due to gains in labour productivity. This was above 2% up to the early 2000s but has since declined to between 0.5 and 1%.

Question 40

Labour productivity can be influenced by...

Answer 40

- Expenditure on research and development - The use of e-commerce - The quality of labour (education, skills and training)

Question 41

Policies to promote economic growth

Answer 41

Monetary, fiscal, microeconomic reform.