Economic Growth

Question 1

economic growth

Answer 1

an increase in the total output of goods and services in a nation over time

Question 2

business cycle

Answer 2

Question 3

accelerator

Answer 3

1. theory that investment spending by firms is a function of rate of change in national income
2. if national income rises, firms’ capital requirements will accelerate
3. extra investment is an autonomous injection which will generate a larger increase in national income
4. economic growth accelerates

Question 4

accelerator-multiplier effect

Answer 4

1. accelerator and multiplier interact to bring about cyclical changes in economy
2. increase in investment in expansion period will have multiplier effect, generating larger increase in national income
3. as economy approaches full capacity and real growth slows, investment needs will fall leading to downturn
4. falls in injections have a downward multiplier effect until need for replacement capital investment causes rate of investment to grow

Question 5

non-economic consequences of growth

Answer 5

• externalities (decreases in environment and physical health)
• inflation (increases in AD cause demand-pull inflation)
• resource depletion (sustainability not reflected in growth figures, growth may be unsustainable)
• structural unemployment (as economy becomes more productive required skills change)
• composition of output (growth may be result of high investments by firms in capital rather than household consumption - capital vs consumer goods; military vs civilian goods if invest in weapons)
• unequal income distribution (low-skilled workers may not profit from growth - can be corrected through transfer payments and progressive taxation)
• balance of payments (rising income means net flow of imports, government shifts to deficit)