Economic performance

Question 1

define economic growth

Answer 1

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

Question 2

describe SR growth

Answer 2

• outward shift of AD which increases RGDP
• @Y1 there is spare capacity as quantity isn’t at max LRAS= creates a negative output gap
  = as AD increases, move closer to full capacity due to higher production of goods and services
  = use up spare capacity= more efficient and productive

Question 3

how to increase AD

Answer 3

• increase IRs= cheaper to borrow and then invest
• decrease income tax= more disposable income to spend on goods
• increase consumer confidence= more likely to borrow money to buy goods
• increase spending on education= higher income jobs= more AD to buy goods
• weaker exchange rate

Question 4

describe LR growth

Answer 4

• happens when LRAS increases to increase productive capacity of an economy
• outward shift of LRAS= move closer to full employment level of output
  = increase competition= higher innovation to find resources for production, increase workforce size to increase labour productivity, increase investment and infrastructure

Question 5

how to increase LRAS

Answer 5

• increase quantity of FOP
• increased quality of FOP
• increase productive efficiency by decrease COP

Question 6

adv of economic growth

Answer 6

• households earn more disposable income
  = firms make more profit= translate to higher wages or promotions
  = increase SOL e.g. more access to healthcare and education
• higher employment rates= more AD= firms need to increase output
  = must employ more labour as labour is a derived demand
• higher profits for firms= can invest into capital

Question 7

disadv of economic growth

Answer 7

• risk of inflation if actual growth exceeds potential= positive output gap in economy= erode purchasing power
• income inequality= growth may come from one dominant sector e.g. oil
  or capital intensive production= owners of capital bought make most profit
  = unequal distribution of profits
• environmental damage= air pollution, deforestation and desertification crease neg externalities of production= high welfare costs due to less resources in LR and description of living space

Question 8

EVAL of economic growth

Answer 8

• need sustainable growth
• inclusive growth needed to be properly beneficial
• need private sector to invest into fair wages

Question 9

describe negative output gap

Answer 9

• where actual level of output is less than the potential level of output
  = far away from YFE (full employment) @ max productive capacity
• puts downward pressure on inflation
  = high unemployment resources in an economy like labour and capital not used to productive potential
  = create spare capacity in economy

Question 10

describe positive output gap

Answer 10

• occurs when actual level of output is more than potential level of output
• can be due to resources being used beyond normal capacity
  e.g. if labour works overtime there high productivity and AD
  = increase inflation

Question 11

describe how output gaps and unemployment relate

Answer 11

• during a recession, there’s high cyclical unemployment
  = create negative output gap= spare capacity of labour productivity

Question 12

EVAL of output gaps

Answer 12

• depends on if there’s a high level of under-employment in UK
  e.g. ppl who have part-time job but want full time hours
• output gap doesn’t only depend on level of unemployment
  = depends on productivity, capital investment spending and average hours worked

Question 13

describe phillips curve

Answer 13

shows possible inverse relationship between unemployment rate and rate of inflation

Question 14

impact of decreasing corperation tax

Answer 14

• firms keep larger % of profits
  = increase post-tax profits for a firm
  = increase funds available to fund capital investment e.g. new tech
  = increase AD due to higher I= increase LRAS as economy’s productive capacity increases
  = injection into circular flow model
  = multiplier effect on demand, output and employment
  = stimulate higher economic growth
  ALSO increases output and profits for firms who supply capital goods

Question 15

eval of tax impacts

Answer 15

• business confidence= low confidence= hold back investment
• tax reduction only benefits firms making profits
• other countries may also reduce cooperation tax= may limit investment
• higher profits may not be spent on investment, instead given as dividends to other shareholders etc