Economic Growth: Basics

Question 1

What is economic growth?

Answer 1

An increase in GDP (which is the value of goods and services produced in a given period of time)

Question 2

GDP will only increase if either…

Answer 2

…aggregate demand or aggregate supply increase

Question 3

What is aggregate demand?

Answer 3

The total demand for all goods and services

AD = C + I + G + X - M

Question 4

What is meant by ‘investment’ when talking about aggregate demand?

Answer 4

Spending by firms on increasing production capacity (e.g. spending on building a new factory or buying new capital)

Note: a person buying shares or foreigners lending money to Australians does NOT affect aggregate demand (unless firms actually spend that money)

Question 5

What is aggregate supply?

Answer 5

The total productive capacity of the Australian economy

Question 6

What are 2 reasons consumption might increase?

Answer 6

1. Increased consumer confidence in an upturn

2. Lower interest rates

Question 7

What are 2 reasons investment might increase?

Answer 7

1. Increased investor confidence in an upturn

2. Lower interest rates

Question 8

What are 2 reasons net exports might increase?

Answer 8

1. A lower exchange rate

2. A higher ToT

Question 9

What are 3 benefits of economic growth?

Answer 9

1. Increased incomes and living standards
2. Increased tax revenue for the government
3. Decreased unemployment

Question 10

What are 4 costs of economic growth?

Answer 10

1. Increased demand inflation
2. A worse BOGS and current account
3. Worse environmental sustainability (from using more resources and more pollution)
4. Wider inequality

Question 11

What is the formula for MPC?

Answer 11

Change in consumption / change in income

Question 12

What is the formula for the multiplier?

Answer 12

1 / MPS

Question 13

What is the formula for the increase in GDP as a result of an injection?

Answer 13

Change in GDP = Injection x Multiplier

Question 14

What are the 3 injections and what are the 3 leakages?

Answer 14

Injections: Investment, Government Spending, Exports

Leakages: Savings, Taxation, Imports

Question 15

If injections are greater than leakages…

Answer 15

GDP will increase due to more AD

Question 16

If leakages are greater than injections…

Answer 16

GDP will decrease due to less AD

Question 17

If injections are equal to leakages…

Answer 17

The economy is in equilibrium and GDP stays the same

Question 18

What are the main trends in Australia’s economic growth over the past 10 years?

Answer 18

2013-2019: Low GDP growth following the end of the mining boom

2020: Negative GDP growth due to lockdowns in the pandemic

2021-22: Strong GDP growth due to recovery from the pandemic, the ToT spike and macro policy

Question 19

What are the main government policies to increase economic growth?

Answer 19

1. Fiscal policy
2. Monetary policy
3. Microeconomic policy

Question 20

What are the 3 types of budget outcome?

Answer 20

Surplus, balanced, deficit

Question 21

What are the 3 types of fiscal stance?

Answer 21

Contractionary, neutral, expansionary

Question 22

What is the difference between an expansionary fiscal stance and a budget deficit?

Answer 22

A deficit is a negative budget in one year, an expansionary stance is a worsening of the budget from one year to the next

Question 23

What is the difference between a budget surplus and a contractionary fiscal stance?

Answer 23

A surplus is a positive budget in one year, a contractionary stance is an improvement of the budget from one year to the next

Question 24

Two examples of a non-discretionary (or cyclical) change to the budget are…

Answer 24

1. People earn more in a boom, so pay more in tax

2. Fewer people are unemployed in a boom, so fewer people receive unemployment payments (Jobseeker)

Question 25

Two examples of a discretionary (or structural) change to the budget are…

Answer 25

1. The government increases tax rates

2. The government cuts spending (e.g. on welfare or infrastructure)

Question 26

How can fiscal policy improve economic growth?

Answer 26

During a downturn, the government can use it to increase aggregate demand

Question 27

How can monetary policy improve economic growth?

Answer 27

During a downturn, the government can use it to increase aggregate demand

Question 28

How can microeconomic reform improve economic growth?

Answer 28

The government use it to improve the efficiency of industries in the economy, increasing aggregate supply

Question 29

Why is microeconomic reform a more sustainable policy for improving economic growth?

Answer 29

Micro improves efficiency and leads to less inflation, while macro (fiscal/monetary) increases AD leading to higher inflation