Economic Growth

Question 1

What are the demand side factors that can increase economic growth?

Answer 1

Lower interest rates - reducing the cost of borrowing and leading to higher investment and higher consumption

Lower taxes - increase disposable income

Higher confidence in the economy - encouraging spending and investment

Question 2

Limits to EG in the SR?

Answer 2

There is a limit to how much AD can increase. After that, there will be inflation.

Question 3

Factors that could increase LRAS?

Answer 3

The straight lined LRAS
(Supply side policies)
Increased investment in productive capacity

Better education and training

Improvements in technology, further leading to lower costs of production.

Improvements such as infrastructure, such as transport

Net migration causing a rise in the labour supply

Question 4

Factors that affect the long run trend?

Answer 4

Supply side improvements

Labour productivity

Efficiency gains

Size of labour force

Question 5

What is the output gap?

Answer 5

The difference between potential GDP and actual GDPD

Question 6

Positive Output Gap

Answer 6

A positive output will ccur when the actual economic growth is above the sustainable potential.

Firms are temporarily producing at Y2, which is greater than Yf (full employment). They have increased output in the short run by getting people to work overtime but this is stretching output is unsustainable.

Question 7

Negative Output Gap

Answer 7

This occurs when the economic growth is below sustainable potential.

Question 8

Impact of a negative output gap

Answer 8

Resources wasted - unemployment

Inflation falling below target

Higher government borrowing due to falling tax revenues and higher spending on benefits.