chapter 11.1 test

Question 1

1) Copy figure 11.1 and explain what two concepts it illustrates

Answer 1

• long run economic growth is shown by the outward movement of PPF1 to PPF2, or the movement from A to B. This is the increase in the potential level of real output the economy can produce over a period of time
• short run economic growth (or economic recovery) is shown byy the movement from a point inside the PPF to a point on the PPF (C to A)

Question 2

difference between short run and long run growth

Answer 2

• short run growth brings idle resources into production and takes up slack in the economy
• long run economic growth increases the economy’s production potential

Question 3

2) Copy figure 11.2 and explain what it illustrates when AD increases from AD1 to AD2 then to AD3 and finally to AD4

Answer 3

• an increase in CIGX or decrease in M cause the AD curve to shift to the right
• initially, the rightward shift of the AD curve from AD1 to AD2 causes the real output to increase from y1 to y2, but the price level stays the same at P1, because the SRAS curve is horizontal at low levels of output
• as output rises, the SRAS curve begins to slope upwards which means that further increases of aggregate demand lead to inflation as well as rising real output
• short run growth gradually absorbs the spare capacity in the economy until there are no longer any idle resources and the economy is producing on the LRAS curve

Question 4

3) P. 369 The trend growth rate. What do you find out about the trend growth rate of the UK economy?

Answer 4

• the trend growth rate is the rate at which output can grow on a sustained basis without putting pressure on inflation
• before the 2008 recession, the UK’s trend growth rate was about 2.5% a year
• it has been estimated that the UK trend growth has fallen over the last 10 years to below 2%, possibly even closer to 1%, as the number of people who are economically inactive has increased in recent years, partly due to covid

Question 5

4) Copy figure 11.4. What causes long run economic growth?

Answer 5

• the main causes of economic growth lie in the supply side of the economy
• once full capacity is reached at the level of real output y1, for sustainable economic growth to continue, the LRAS curve must shift right to LRAS2. The new full capacity level is y2.
• determinants of long run growth include tech improvements, resulting from investment, increases in the size of the labour force, improvements in productivity, attitudes, enterprise, the mobility of factors of production and economic incentives faced bt entrepeneurs and workers

Question 6

5) Produce a table to summarise both the costs and benefits of economic growth

Answer 6

COSTS:
- uses up finite resources such as oil and minerals
- leads to pollution and forms of environmental degredation
- can destroy local cultures and widen inequalities in distribution of income and wealth
- leads to urbanisation and spread of huge cities, swallowing agricultural land
- leads to rapid growth in population
- countries suffering low growth may enter declining business confidence, low profits, low investment, no growth and so on

BENEFITS:
- increases standards of living and welfare
- can lead to communities that work to improve the environment
- provides new and more environmentally friendly technologies
- increased life expectancy and means to reduce disease
- provides a route out of poverty for a lot of the world’s population
- increases tax revenues that can be used to increase economic welfare of the whole community
- can generate circle of increased business confidence, investment, competitiveness, but only for some (the winners)

Question 7

6) P. 375. The Economic cycle. Do a sketch of figure 11.6. Then add labels from figure 11.7 (if you can). Analyse the ‘trend’ line (in green) - what does it mean? Analyse the purple wavy line - what does it show?

Answer 7

• the green line shows the overall growth of the economy
• the purple line shows the more detailed fluctuations in growth within the economy, such as recovery (when real GDP begins to grow after the end of recession) and boom (when the level of real output becomes greater than the trend level of output)

Question 8

7) P. 380. Copy figure 11.10. What is the difference between a positive and a negative output gap? On the diagram show where the economy has a negative output gap and a positive output gap

Answer 8

• positive output gap is when the level of actual real output in the economy is greater than the trend output level
• the negative output gap is when the level of actual real output in the economy is lower than the trend output level