7.3 Economic Growth

Question 1

What is short run economic growth?

Answer 1

An increase in aggregate demand brings spare capacity into production

Question 2

What is long run economic growth?

Answer 2

When the productive capacity of the economy is increasing. It is used to refer to the trend rate of growth of real national output in an economy over time.

Question 3

What are benefits of economic growth?

Answer 3

Rise in living standards
Lower unemployment
Reduced poverty
Improved government fiscal position

Question 4

What are the costs of economic growth?

Answer 4

Negative externalities
Inequality
Increased use of scarce resources
Inflation

Question 5

What are primary concerns about sustainable economic growth?

Answer 5

Pace and scale of resource depletion
Permanent damage to the environment
Climate change and biodiversity

Question 6

What is sustainable economic growth?

Answer 6

Sustainable economic growth is the rate of growth that can be maintained that does not compromise the quality of life for future generations

Question 7

What are demand/supply side shocks?

Answer 7

Unexpected changes in the economy that directly impact on aggregate demand/supply

Question 8

What factors cause cyclical instablility?

Answer 8

Excessive growth in credit and levels of debt
Asset price bubbles
Destabilising speculation
Animal spirits or herding

Question 9

What is an asset price bubble?

Answer 9

The price of an asset, usually property, stocks or gold, has deviated significantly from its intrinsic value and prices rise very quickly in the short term

At a certain price, which is very difficult to predict with any accuracy, the ‘bubble bursts’ as prices move down to reflect more accurately their underlying economic value

Question 10

What are animal spirits?

Answer 10

Term created by Keynes

Aimed to capture the instincts that guide decision making and rational economic behaviour

Not the same as speculation but can have a destabilising effect on the economy