CHAPTER 8 ECON GROWTH

Question 1

What is actual growth and what are its causes?

Answer 1

Actual growth occurs when there is an increase in the equilibrium level of real NY.
It is caused by an increase in AD (C+I+G+X-M) or as increase in SRAS, which shifts downwards when there is a reduction in the cost of production in the economy.

Question 2

What is potential growth and what are its causes?

Answer 2

Potential growth is the rate at which the economy could grow if it were to use all its resources.
It is illustrated by an increase in the LRAS.
A rise in productive capacity occurs when the qty, qual of labour and capital increases and levels of entrep and tech improvements increase.

Question 3

What is sustained economic growth and what causes it?

Answer 3

Occurs when an economy experiences non-inflationary rate of growth that can be maintained over time.
This occurs when actual and potential growth is achieved, and growth is non-inflationary by lowering GPL.

Question 5

What are the consequences of economic growth?

Answer 5

1. Households
   - Rising wages and living standards. With a rise in RNY, more goods are produced. As labour is derived demand, the rise in demand for labour leads to an increase in eq level of labour employed. Wages rise, which raises the purchasing power of labour and hence increases material standard of living.
2. Firms
   - Increased profits. Greater demand for goods and services due to an increase in purchasing power. Boost in sales revenue as a result of increased demand for GST within the economy.
   - **Lowering costs. ** Higher profitability allows for greater investment in R+D, resulting in technological innovations that raise the productivity and lowers the COP.
3. Govt and Econs
   - Improvement in governments budget balance. Rising real GDP leads to rising employment, wages profits and expenditure. This enables the government to collect more tax revenue via direct and indirect tax. Govt spends less on transfers such as unemployment benefits as unemp rate shrinks.
   - Reduction in unemployment.

Question 6

What are the disadvantages of economic growth?

Answer 6

1. Increased unemployment of lowskilled labour.
   - Economic growth enables firms to increase profits and improve technologies. This may lead to increased investment on AI and automation, which replaces the need for manual jobs of routine tasks.
2. Inflation
   With econ growth, householdsfirms may be very optimistic about the future. This leads to increased consumption and investments. If economy works in classical or intermediate range, AS will not be able to meet AD rise. This leads to goods shortages, resulting a worsening material SOL, especially since households are now unable to puirchase the same amount of goods due to rising prices.
3. Environmental Degradation
   Economic growth leads to the greater use of resources to produce goods. This use of resources can lead to environmental damage. This may lead to pollution that threatens human health and safety. This worsens the QOL snd hence worsen non material SOL.
4. Increase income inequality and non-inclusive growth.
   More GST are bering produced, diff sectors of the economy will expand at a different pace. This means that the demand for labour in different sectors rises disproportionally. Hence wages between sectors grow at different rates. This can lead to rising inequality.

Question 7

What is expansionary FP and how does it address [recession and slow rates of economic growth?]

Answer 7

1. **Raising government expenditure. **
   - On goods and services. Raises the G component
   - Transfer payments. To households raises the disposable income of households. Rising purchasing power leads to increased consumption of GST. Raises C component.
2. Reducing Tax Rates
   - Reducing direct tax rates. When income taxes are reduced, disposable income and purchasing power of households will increase, leading to an increase in consumption expenditure. This raises AD. When corporate taxes are reduced, it leads to an increase in aftertax profit, increasing expected profitability, leading to an increase in investment expenditure. This raises AD thereby raising real NY.
   - Reducing indirect tax rates. Export tax can be reduced to enhance the price competitiveness of the country’s exports. This encourages exports, resulting in an increase in export revenue. Higher import tariffs can be imposed, to discourage imports. This increases X-M, raising AD.

Question 8

What are the limitations of expansionary FP?

Answer 8

1. Size of multiplier. If multiplier is small, the multiple increase in induced consumption will also be relatively smaller. This results in an increase that is smaller in overall induced consumption and NY will increase lesser.
2. The possibility of crowding out effect. Increasing government spending and/or reducing taxes may result in a budget deficit, which must be financed. Budget deficit can be financed through using government reserves which is accumulated from past years government budget surplus or through borrowing. Most governments finance the deficit by borrowing the shortfall between expen and rev.
   Govt competes with private sector for loans, driving up interest rates in the financial market.
   Rise in govt expen will be competing with the private sector for loans, driving up interest rates. Government competes with the pricate sector for resources such as land an labour. The higher demand for resources would lead to higher factor prices.
   with decreased profits. firms may be less willing and able to invest, leading to a fall in investment expenditure.
   This is a crowding out effect.

Question 9

How do central banks adjust their country’s money supply?

Answer 9

1. Open Market Operations. Central banks buy or sell securities on the open market to influence the money supply in the economy. Open market salews of bonds by the centbank raises the money supply and vice versa.
   2.** Varying ther cash reserve ratio**. CRR, set by the central bank, is the percentage of a commercial bank’s deposits that it must keep in cash as a reserve in case of mass customer withdrawals. If the central bank reduces the CRR, commercial bank will be able to provide more loans to the public. This raises the money supply, reducing interest rates. vv
2. Varying the bank rate. The bank rate is the i/r charged by the centbank for loans made to commercial banks. If it is raised commercial banks are less willing to provide loans to the public. This reduces the money supply and vice versa.