2.5 Economic Growth

Question 1

What is economic growth?

Answer 1

An increase in the quantity of goods/services produced in an economy over a period of time.

Often measured by the percentage change in real GDP.

Question 2

What causes short-run economic growth?

Answer 2

Changes to any of the components of aggregate demand (AD).

Illustrated by a rightward shift in the AD curve.

Question 3

What is represented by a rightward shift in the AD curve?

Answer 3

An increase in consumption, investment, government spending, or net exports.

This leads to an increase in real GDP.

Question 4

How is short-run economic growth illustrated on a PPF model?

Answer 4

By moving from a point inside the curve to a point closer to the curve.

This signifies an increase in real GDP.

Question 5

What factors contribute to long-run economic growth?

Answer 5

Improvements to the quality or quantity of the factors of production.

These include determinants of long-run aggregate supply.

Question 6

What does an increase in long-run aggregate supply (LRAS) indicate?

Answer 6

An increase in the potential output of the economy.

This can be due to enhanced competition policies or increased number of firms.

Question 7

What is the difference between actual and potential economic growth?

Answer 7

Actual growth is the increase in goods/services produced, while potential growth is the increase in productive potential.

Potential growth is illustrated by a shift outward of the PPF or LRAS curve.

Question 8

What characterizes a positive output gap?

Answer 8

When real GDP is greater than potential real GDP.

Indicates that the economy is producing more than its sustainable capacity.

Question 9

What indicates a negative output gap?

Answer 9

When real GDP is less than potential real GDP.

Suggests there is spare capacity in the economy.

Question 10

What are the four stages of the trade (business) cycle?

Answer 10

• Peak/boom
• Slowdown/downturn
• Recession
• Recovery

These stages reflect fluctuations in real GDP.

Question 11

What is a characteristic of a recession?

Answer 11

Two consecutive quarters of negative economic growth.

This often correlates with increasing unemployment.

Question 12

What are the benefits of economic growth?

Answer 12

• Increased incomes leading to better standards of living
• Decreased levels of absolute poverty
• Improvement in environmentally friendly technologies
• Higher sales revenue for firms
• Increased investment by firms
• Reduced government expenditure on benefits
• Increased employment

These contribute to societal improvements.

Question 13

What are the costs of economic growth?

Answer 13

• Demand-pull inflation
• Lack of equity in income distribution
• Environmental damage from production
• Increased inflation harming export sales
• Delayed investment due to decreased export sales
• Increased consumption of demerit goods
• Decreased leisure time and well-being

These can lead to social and economic challenges.

Question 14

What does a long-term growth trend represent?

Answer 14

The underlying trend rate of economic growth over a longer period.

Determined by constant increases in productive capacity.

Question 15

What can indicate a positive output gap is developing?

Answer 15

Rapidly rising prices.

Suggests the economy is over-producing relative to its sustainable capacity.

Question 16

What does a negative output gap suggest about the economy?

Answer 16

There is spare capacity and a slowdown in economic growth.

Often associated with rising unemployment.

Question 17

True or False: The components of aggregate demand rise and fall at the same rate.

Answer 17

False.

Different components may respond differently during economic cycles.

Question 18

Define the term long-run economic growth

Answer 18

Long-run economic growth occurs when there are improvements to the quality and/or quantity of the factors of production.

Question 19

True or False?

Short-run economic growth can be illustrated by a rightward shift in AD on an AD/AS diagram

Answer 19

True.

Short-run economic growth can be illustrated by a rightward shift in AD on an AD/AS diagram.

Question 20

What is actual economic growth?

Answer 20

Actual economic growth is an increase in the quantity of goods and services produced in an economy in a given period of time.

Question 21

How is actual economic growth often measured?

Answer 21

Actual economic growth is often measured by the percentage change in real Gross Domestic Product (GDP).

Question 22

What does potential growth demonstrate?

Answer 22

Potential growth demonstrates an increase in the productive potential of an economy.

Question 23

What is export-led economic growth?

Answer 23

Export-led economic growth occurs when there is an increase in the sale of goods and services to other countries.

Question 24

How does an increase in the value of exports affect real GDP?

Answer 24

An increase in the value of exports increases real GDP.

Question 25

Which component of aggregate demand does international trade affect?

Answer 25

International trade affects the net trade component of aggregate demand, (X-M).

Question 26

What is the relationship between the value of exports and GDP for many developing countries?

Answer 26

For many developing countries the value of exports represents a large proportion of AD. This increases Gross Domestic Product (GDP).

Question 27

Which large country experienced significant export-led economic growth from 1988 to 2008?

Answer 27

China experienced significant export-led economic growth from 1988 to the global financial crisis of 2008.

Question 28

Define long-term growth trend.

Answer 28

A long-term growth trend is the underlying trend rate of economic growth over a longer period of time.

Question 29

How is an increase in the productive capacity of an economy illustrated on an AD/AS diagram?

Answer 29

An increase in the productive capacity of an economy is illustrated by a rightward shift of the long-run aggregate supply curve (LRAS).

Question 30

Define the term output gap.

Answer 30

An output gap is the difference between the actual level of real national output (real GDP) and the maximum potential level of real national output.

Question 31

Which macro-economic performance indicators suggest a negative output gap is increasing?

Answer 31

Rising unemployment and a slowdown in economic growth can indicate that a negative output gap is increasing.

Question 32

How is a negative output gap illustrated on an AD/AS diagram?

Answer 32

A negative output gap is illustrated on an AD/AS diagram by showing the actual real national output below the potential real national output.

Question 33

What is the classical view on negative output gaps?

Answer 33

The classical view is that real national output will return to the potential level in the long-run at a lower price level.

Question 34

What is the Keynesian view on negative output gaps?

Answer 34

The Keynesian view is that an economy can remain in a negative output gap in the long-run.

Question 35

True or False? A positive output gap is sustainable in the long run.

Answer 35

False. A positive output gap is not sustainable. The classical view states that real national output will return to the potential output but at a higher price level.

Question 36

What is a trade or business cycle?

Answer 36

A trade or business cycle refers to the changes in real GDP that occur in an economy over time.

Question 37

What is the relationship between real GDP fluctuations and the long-term trend rate of growth?

Answer 37

The relationship is that real GDP fluctuates above and below the long-term trend rate of growth.

Question 38

How is a positive output gap identified on a trade cycle diagram?

Answer 38

A positive output gap is identified by real GDP growth exceeding the trend line on a trade cycle diagram.

Question 39

True or False? A negative output gap occurs when real GDP growth is above the trend line.

Answer 39

False. A negative output gap occurs when real GDP growth is below the trend line.

Question 40

How can the flow of real GDP through the different stages of the trade cycle be managed?

Answer 40

The flow of real GDP through the different stages of the trade cycle can be managed through government intervention.

Question 41

What happens to unemployment during a recession?

Answer 41

During a recession, unemployment increases or remains high.

Question 42

How does a recession affect business and household confidence?

Answer 42

A recession leads to low confidence for firms and households.

Question 43

What typically happens to government expenditure during a recession?

Answer 43

During a recession there is typically an increase in government expenditure. This could lead to a greater budget deficit.

Question 44

What happens to unemployment during a boom?

Answer 44

During a boom, unemployment decreases and job vacancies increase.

Question 45

True or False? Inflation usually falls during a boom.

Answer 45

False. During a boom there is usually an increasing rate of demand-pull inflation.

Question 46

What is considered to be the key cause of rising living standards?

Answer 46

Economic growth is considered to be the key cause of rising living standards.

Question 47

How does economic growth affect absolute poverty?

Answer 47

Economic growth leads to decreased levels of absolute poverty.

Question 48

What is a possible environmental benefit of economic growth?

Answer 48

A possible environmental benefit of economic growth is an improvement in the development of environmentally friendly technology. This will help to reduce external costs.

Question 49

True or false? Economic growth always leads to an equitable income distribution.

Answer 49

False. Economic growth can lead to a lack of equity in the distribution of income. The rich may get richer and the poor may get poorer.

Question 50

How does economic growth affect a government's tax revenue?

Answer 50

Economic growth leads to higher tax revenue for a government due to rising incomes for consumers and profits for firms.

Question 51

What is a possible negative effect of economic growth on a country's exports?

Answer 51

A possible negative effect of economic growth on a country's exports is that increased inflation can harm the sale of exports.

Question 52

What is a possible social benefit of economic growth?

Answer 52

A possible social benefit of economic growth is that increased employment should alleviate some of the detrimental social impacts of unemployment.

Question 53

How might economic growth affect the consumption of de-merit goods?

Answer 53

Economic growth might lead to an increase in consumption of de-merit goods due to higher incomes.

Question 54

True or False? Economic growth always leads to environmental damage.

Answer 54

False. While economic growth can cause environmental damage it can also lead to improvements in environmentally friendly technologies.