Macroeconomics 2.1 Economic Growth Flashcards
What is economic growth?
An increase in the productive capacity or potential of the economy.
What is the policy objective of economic growth?
To increase the overall output and efficiency of an economy.
What are the different stages of the economic cycle?
- Boom
- Downturn
- Recession
- Recovery
What do real and nominal GDP refer to?
Real GDP is adjusted for inflation, while nominal GDP is measured at current prices.
How is economic growth measured?
By calculating the changes in GDP over time.
What is the formula for Aggregate Demand (AD)?
AD = C + I + G + (X - M)
Who are the two economic agents in the basic circular flow?
- Households
- Firms
What are the three withdrawals from the circular flow?
- Savings
- Taxes
- Imports
What are the three injections into the circular flow?
- Investment
- Government spending
- Exports
What do SRAS and LRAS stand for?
- SRAS: Short-Run Aggregate Supply
- LRAS: Long-Run Aggregate Supply
Name two factors that affect consumption decisions.
- Disposable income
- Consumer confidence
Name two factors that affect investment decisions of firms.
- Interest rates
- Business expectations
What shifts Short-Run Aggregate Supply (SRAS)?
Changes in production costs, supply shocks, and temporary changes in labor productivity.
What shifts Long-Run Aggregate Supply (LRAS)?
Changes in the quantity and quality of factors of production.
What is the multiplier?
The ratio of change in national income to the initial change in spending that caused it.
What is the accelerator?
The principle that an increase in national income leads to a larger increase in investment.
Write one formula for calculating the multiplier.
Multiplier = 1 / (1 - MPC)
Write another formula for calculating the multiplier.
Multiplier = Change in GDP / Initial Change in Spending
Write a third formula for calculating the multiplier.
Multiplier = 1 / MPW
What does MPW stand for?
Marginal Propensity to Withdraw
What is short-term economic growth?
An increase in real GDP due to rising demand.
List three policies that could be used to stimulate Aggregate Demand.
- Tax cuts
- Increased government spending
- Lowering interest rates
Does government intervention to stimulate short-term economic growth work? True or False?
True, but there are advantages and disadvantages.
What are the advantages of government intervention for short-term economic growth?
- Increased national income
- Lower unemployment
- Enhanced consumer confidence
What are the disadvantages of government intervention for short-term economic growth?
- Inflationary pressures
- Increased national debt
- Potential market distortions
What is the definition of the trend rate of economic growth?
The rate of economic growth that can be maintained in the long term.
What are the causes of increases in the trend rate of economic growth?
- Technological advancements
- Increases in productivity
- Improvements in human capital
What is net investment?
Investment after accounting for depreciation.
What is replacement investment?
Investment made to replace worn-out or obsolete capital.
What is the economic cycle?
Fluctuations in economic activity around the productive potential of an economy.
What happens during a recession?
Demand falls, output decreases, and unemployment rises.
What characterizes a boom phase in the economic cycle?
High demand, rapid growth, and low unemployment.
What is the relationship between GDP and economic recessions?
Recessions are typically defined by two consecutive quarters of negative GDP growth.
How is GDP per capita calculated?
Real GDP divided by the population of a country.
What is purchasing power parity (PPP)?
A method to adjust GDP per capita for relative prices across countries.
What is long-term economic growth?
An increase in the productive potential/capacity of an economy over time.
What are the factors of production that influence long-term economic growth?
- Labour
- Capital
- Enterprise
- Land
What are the benefits of economic growth?
- Increased employment
- Higher disposable incomes
- Improved living standards
What are the costs of economic growth?
- Environmental degradation
- Income inequality
- Increased inflation
The underlying long-term trend rate of economic growth can be defined as the:
The rate of economic growth that can be maintained in the long term.
What is one of the benefits of economic growth related to income?
Increased disposable incomes
This leads to higher consumer spending and improved living standards.
What is a benefit of economic growth that affects employment?
Increased employment
Economic growth typically creates more job opportunities.
Fill in the blank: Economic growth can lead to lower spending on _______.
benefits
This occurs as more individuals gain employment and become self-sufficient.
What happens to the market failure of inequalities in income distribution due to economic growth?
Reduces the market failure of inequalities in the distribution of income
Economic growth can help bridge the gap between different income groups.
What is a potential environmental cost of economic growth?
Increased negative externalities such as pollution
Economic activities can lead to environmental degradation.
True or False: The Kuznets Curve suggests that income inequality decreases as an economy grows.
False
The Kuznets Curve indicates that inequality may initially increase during economic growth before decreasing.
What does the Lorenz Curve represent?
Income and wealth distribution in an economy
It visually illustrates how income is distributed among different segments of the population.
Explain the relationship shown by the Environmental Kuznets Curve.
As GDP per capita increases, emissions and pollution initially rise but eventually fall
This suggests that wealthier economies may invest more in clean technologies.
List three potential problems with the Kuznets Curve.
- It may not account for all countries equally
- It assumes a linear relationship between growth and inequality
- It overlooks the effects of globalization on income distribution
These problems challenge the model’s accuracy in explaining economic growth and inequality.
What is one of the costs of economic growth that relates to inflation?
Potential inflationary impacts of short-term/actual growth
Rapid economic growth can lead to demand-pull inflation.
Fill in the blank: Government interventions may be necessary to address _______ associated with economic growth.
negative externalities
This includes measures to reduce pollution and other environmental impacts.
What is a benefit of economic growth that relates to government finances?
Improved government finances
Economic growth increases tax revenues, helping reduce budget deficits.
What is the accelerator effect in relation to economic growth?
Higher rates of investment leading to technological improvements
This effect suggests that increased demand leads to more investment in production capacity.
What does increased utility from the consumption of goods and services imply?
Consumers experience greater satisfaction and welfare
Economic growth can enhance the variety and quality of available goods.
Explain how economic growth can impact healthcare funding.
Increased spending on healthcare
Economic growth allows for more government and private investment in health services.
