econ plus dal: causes of economic growth

Question 1

what is economic growth?

Answer 1

the increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS

Question 2

an increase in AD is known as what type of growth?

Answer 2

short run growth/ actual growth

the economy is using up spare capacity to increase real GDP

Question 3

when labelling a macro PPC what do you need to label the axis with?

Answer 3

goods (y) and services (x)

Question 4

causes of short run growth are?

Answer 4

lower interest rates (makes cheaper for consumers to borrow and cheaper for businesses to invest so increases in consumption and investment and can also weaken the exchange rate which can boost net exports)

lower income tax/ corporation tax (more disposable income so consumption increases, consumer spending and confidence also/ corporation tax means more retained profit for firms which they can use to invest)

higher consumer and business confidence (increases consumption and investment)

higher government spending

weaker exchange rate (boosts net exports)

Question 5

reason why short run/ actual growth occurs when there are lower interest rates?

Answer 5

makes cheaper for consumers to borrow and cheaper for businesses to invest so increases in consumption and investment and can also weaken the exchange rate which can boost net exports

Question 6

reason why short run/ actual growth occurs when there are lower income tax/ corporation tax?

Answer 6

more disposable income so consumption increases, consumer spending and confidence also/ corporation tax means more retained profit for firms which they can use to invest

Question 7

reason why short run/ actual growth occurs when there are higher consumer and business confidence?

Answer 7

increases consumption and investment

Question 8

reason why short run/ actual growth occurs when there are weaker exchange rates?

Answer 8

boost in net exports

Question 9

when does long run/ potential growth occur?

Answer 9

when there is an increase in LRAS so an increase in the productive capacity of an economy

Question 10

causes for long run/ potential growth are? the MAIN GREEN points

Answer 10

increase in quantity of FOP
increase in quality of FOP
increase in productive efficiency

Question 11

causes for long run/ potential growth are? the RED POINTS and link to the MAIN GREEN POINTS

Answer 11

increase in labour productivity (increases quality of labour so LRAS shifts right)

increase in the workforce size (due to immigration this increases the quantity of labour which is a FOP so LRAS shifts right)

investment (spending on capital by firms to develop which increases the quantity and quality of capital and reduces long run costs for firm)

infrastructure improvements (in terms of transport it becomes cheaper and easier to transport goods and services and to access raw materials so long run costs of production would fall. in terms of physical capital infrastructure there is an increase in the quantity of capital)

increased competition (firms must reduce their long run costs of production in order to be competitive. competition improvements in the economy means firms are incentivised to boost productivity to stay in competition)

new resources (new land/ resources shifts LRAS to the right)

Question 12

reason why long run growth takes place when there is an increase in labour productivity?

Answer 12

(increases quality of labour so LRAS shifts right)

Question 13

reason why long run growth takes place when there is an increased investment?

Answer 13

spending on capital by firms to develop which increases the quantity and quality of capital and reduces long run costs for firm

Question 14

reason why long run growth takes place when there is an increase in increase in the workforce size?

Answer 14

due to immigration this increases the quantity of labour which is a FOP so LRAS shifts right

Question 15

reason why long run growth takes place when there is infrastructure improvements?

Answer 15

in terms of transport it becomes cheaper and easier to transport goods and services and to access raw materials so long run costs of production would fall. in terms of physical capital infrastructure there is an increase in the quantity of capital

Question 16

reason why long run growth takes place when there is increased competition?

Answer 16

firms must reduce their long run costs of production in order to be competitive. competition improvements in the economy means firms are incentivised to boost productivity to stay in competition

Question 17

reason why long run growth takes place when there is new resources?

Answer 17

its new land so these resources shifts LRAS right