Economomic Growth

Question 1

What is economic growth

Answer 1

Economic growth is an increase in the real gdp of a country arising from an increase in aggregate demand or increase in aggregate supply

Question 2

What is short term growth caused by

Answer 2

An increase in aggregate demand which arises from using spare capacity to increase output

Question 3

Draw short run growth

Answer 3

Increase in AD

Question 4

What are some causes of increases in AD

Answer 4

• lower interest rates
• lower income and corporation tax
• higher consumer and business confidence
• increase in government spending
• weaker exchange rate

Question 5

What is long run economic growth

Answer 5

Long run economic growth is caused by an increase in the long run aggregate supply which leads to an increase in the productive capacity. Of an econom6

Question 6

Draw long run growth on a diagram

Answer 6

• increase in lras
  -yfe 1 to yfe 2

Question 7

What causes an increase in lras

Answer 7

• increase in the quality and quantity of FOP
• Increase in productive efficiency

Question 8

What causes lras (list)

Answer 8

• increase in the size of labour force -> migration
• increased investment -> make workers more productive can increase quality and quantity and decrease in long run costs of production
• Imporvemnts in infrastructure -> more efficient which decreases long run costs and schooling which can increase quality
• competition
• new resources leads to an increase in quantity of land

Question 9

Draw the trade cycle

Answer 9

• actual growth
• trend growth
• real gdp
• time

Question 10

What are the 4 stages of trade cycle

Answer 10

• boom -> highest point
• recession -> coming down from hugest point fall in real gdp
• recovery -> rising in real gdp
• trough -> lowest point

Question 11

What are the characteristics of a boom

Answer 11

• growth is faster than trend
• higher Ad, higher employment, high business and consumer confidence, high tax revenue

Question 12

What are the characterises of a recession and trough

Answer 12

• falling ad, high unemployment, low business and consumer confidence, fall in house prices, heavy discounting, low inflation, low demand for imports

Question 13

Recovery characterises

Answer 13

Rising AD, rising employment, increased confidence, house prices higher, higher investment

Question 14

What is a negative output gap

Answer 14

A negative output gap si when actual output is below potential output

Question 15

Draw a negative output gap

Answer 15

SRAS
Ad
Lras to the right of macroeconomic equilibrium
Gap between y1 and yfe is output gap

Question 16

What is a positive output gap

Answer 16

A positive output gap is when actual output is greater than potential output
- demand is high and producers are producing above their efficient capabilities
- economic growth is unsustained

Question 17

Draw a positive output gap

Question 18

What causes fluctuations in the trade cycle

Answer 18

• demand side and supply side shocks

Question 19

What si a demand side shock

Answer 19

A demand side shock refers to unpredictable events which cause a reduction in AD

Question 20

Give examples of demand side shocks

Answer 20

• increase in interest rates
• lower government spending
  Higher taxation

Question 21

What are supply side shocks

Answer 21

Supply side shocks are unpredictable events which cause a shock decrease in SRAS and lras

Question 22

What are some examples

Answer 22

• increases in cost of raw materials such as oil and fuel
• natural disaster

Question 23

What are benefits of economic growth

Answer 23

• higher disposable income
• higher employment
• Higher profits for businesses
• increase fiscal dividend for government

Question 24

How is higher disposable income caused by economic growth

Answer 24

• firms have higher profits which pass onto workers
• workers join the labour force
• some workers get promotion

Question 25

How is higher employment a benefit

Answer 25

• more demand for g&s more workers needed
  This leads to more workers working who earn an income which leads to higher living standards

Question 26

How is higher firm profits a benefit

Answer 26

• leads to more investment into capital goods which leads to accelerator effect occurring

Question 27

How is higher fiscal dividends a benefit

Answer 27

• higher fiscal dividends occur as more vat from increased demand, higher incomes more income tax, higher profits more corporation tax, higher imports higher tarrif tax
• allows them to spend on government policies

Question 28

what are some costs of economic growth

Answer 28

• lead to demand pull inflation which decreases purchasing power of higher incomes
• environmental costs
• lead to income inequality
• current account deficit due to increase incomes and demand for imports

Question 29

How can income inequality be caused

Answer 29

• one dominant sector -> leads to higher wages in that specific sector
• more capital intensive production than labour leading to owners of capital to benefit
• more growth in urban areas than rural areas -> increase divided
• lack of redistribution policies

Question 30

What is necessary for benefits to be maximised

Answer 30

Co op form private sector and government
- sustainable and inclusive economic growth