Government Economic Policy Objectives

Question 1

What is economic growth

Answer 1

Economic growth is an increase in the productive potential of an economy.

Question 2

What causes an increase in economic growth in the long run

Answer 2

Increase in capacity or productive potential usually due to a rise in quantity or quality of inputs. Long run growth is shown by increase in trend rate of growth. Increases in long run are caused by an increase in AS

Question 3

What happens during a boom

Answer 3

GDP is growing quickly
Reduction in unemployment
Rise in inflation
Increase in investment

Question 4

What happens in a recession/slump?

Answer 4

Rise in unemployment
Fall in prices
Less investment

Question 5

What happens during a recovery

Answer 5

More spending so ad will increase
Reduction in unemployment
Inflation rises
Increase in investment

Question 6

What are the ways of creating short run economic growth?

Answer 6

Short run economic growth is as a result of rising ad theses factors are called demand side factors.
Lowering interest rates = encourages investment and increase consumer spending
Rising welfare benefits increases government and consumer spending
A rise in SRAS also increases economic growth

Question 7

What are the ways of creating long run economic growth?

Answer 7

It’s a result of supply side factors that increase the potential for economic growth. It can be done by raising the quantity of quality of the products produced.

Question 8

What are the benefits of economic growth?

Answer 8

~ leads to higher wages for employees. Therefore it rises the standard of living as long as prices don’t rise more than the increases in wages
~ firms earn a greater profit during economic growth as consumers tend to spend more and so firms sell more. Profit can be used to buy new machinery which increases productivity.m
~ increases in government revenue from taxes and a reduction in the benefits they need to pay. The money can be used to increase public spending without rising taxes.

Question 9

What are the consequences of economic growth?

Answer 9

~ can create income inequality, where low skilled workers may find it hard to get the higher wages that other workers are benefiting from.
~ if economic growth rises faster than supply then demand pull inflation will rise
~ deficit in the balance of payments as more money means more imports

Question 10

What is cost push inflation

Answer 10

Inflation that is caused by the rising cost of inputs to production