Causes of Economic growth (Short Run and Long Run)

Question 1

What is economic growth?

Answer 1

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

GDP stands for Gross Domestic Product, which measures the economic performance of a country.

Question 2

What does an increase in AD lead to?

Answer 2

Short-run economic growth.

AD refers to Aggregate Demand.

Question 3

What is the difference between short-run and long-run economic growth?

Answer 3

Short-run growth is driven by an increase in AD, while long-run growth involves an increase in LRAS.

LRAS stands for Long-Run Aggregate Supply.

Question 4

What does the term ‘actual growth’ refer to?

Answer 4

An increase in real GDP using spare capacity.

Actual growth can be illustrated using AD/AS diagrams.

Question 5

What does a rightward shift of the AD curve indicate?

Answer 5

The economy is using up spare capacity and closing a negative output gap.

A negative output gap occurs when actual output is less than potential output.

Question 6

What is represented by moving towards the potential output in a PPF diagram?

Answer 6

An increase in economic activity.

PPF stands for Production Possibility Frontier.

Question 7

Fill in the blank: Economic growth can be shown on two diagrams, AD/AS and _______.

Answer 7

PPF

Question 8

True or False: Short-run economic growth can be achieved by utilizing spare capacity.

Answer 8

True

Question 9

What happens as the negative output gap is closed?

Answer 9

The economy produces more output.

This process is essential for moving towards full employment.

Question 10

What does AD equal in the equation AD=C+I+G+(X-M)?

Answer 10

Aggregate Demand equals Consumption (C) plus Investment (I) plus Government Spending (G) plus Net Exports (X-M)

This equation represents the components of aggregate demand in an economy.

Question 11

How do lower interest rates affect borrowing and investment?

Answer 11

Lower interest rates make borrowing cheaper and encourage businesses to invest

This can lead to increased consumption (C) and investment (I).

Question 12

What is the effect of lower income tax on disposable income?

Answer 12

Lower income tax results in more disposable income for households

This increased disposable income leads to higher consumer spending.

Question 13

What does lower corporation tax allow businesses to do?

Answer 13

Lower corporation tax allows businesses to retain more profit for reinvestment

This can lead to increased investment in the economy.

Question 14

What is the impact of higher consumer and business confidence on the economy?

Answer 14

Higher consumer and business confidence leads to increased consumption (C) and investment (I)

Confidence impacts spending and investment decisions positively.

Question 15

What is the role of government spending (G) in aggregate demand?

Answer 15

Government spending (G) is a component of aggregate demand and contributes to economic activity

Increased government spending can stimulate economic growth.

Question 16

How does a weaker exchange rate affect net exports (X-M)?

Answer 16

A weaker exchange rate typically increases net exports (X-M)

This occurs because domestic goods become cheaper for foreign buyers.

Question 17

What does an increase in LRAS indicate?

Answer 17

An increase in LRAS indicates potential economic growth and an increase in productive capacity

It reflects the economy’s ability to produce more goods and services in the long term.

Question 18

Does an increase in LRAS guarantee actual economic growth?

Answer 18

No, an increase in LRAS does not mean the economy is actually growing

It indicates that the potential growth rate of the economy is now at a higher level.

Question 19

Fill in the blank: AD=C+I+G+(X-M) where AD stands for _______.

Answer 19

Aggregate Demand

Question 20

True or False: Lower interest rates always lead to an increase in aggregate demand.

Answer 20

True

Lower interest rates typically stimulate both consumption and investment.

Question 21

What does AD/AS stand for?

Answer 21

Aggregate Demand/Aggregate Supply

AD/AS is a macroeconomic model that explains price levels and output through the relationship between aggregate demand and aggregate supply.

Question 22

What does LRAS represent?

Answer 22

Long-Run Aggregate Supply

LRAS reflects the total output an economy can produce when all resources are fully employed.

Question 23

What does an increase in LRAS indicate?

Answer 23

An increase in potential output

This can occur due to improvements in factors like technology, labor productivity, and capital stock.

Question 24

List three reasons that can shift the LRAS curve.

Answer 24

• Increase in quantity of factors of production
• Increase in quality of factors of production
• Improvement in productive efficiency

These changes can lead to a higher output capacity for the economy.

Question 25

Fill in the blank: The LRAS curve can shift due to an increase in _______.

Answer 25

labor productivity

Question 26

True or False: A reduction in long-run costs can lead to shifts in the LRAS curve.

Answer 26

True ## Footnote Reducing long-run costs can enhance productive efficiency, encouraging shifts in the LRAS.

Question 27

What is the relationship between PPF and LRAS?

Answer 27

Both represent potential output levels in an economy ## Footnote PPF stands for Production Possibility Frontier, showing maximum possible output combinations.

Question 28

What does an increase in the quantity of capital refer to?

Answer 28

An increase in the amount of physical assets used in production ## Footnote This can improve an economy's productive capacity.

Question 29

Explain the term 'productive efficiency'.

Answer 29

The optimal use of resources to produce goods and services ## Footnote Achieving productive efficiency means producing at the lowest possible cost.

Question 30

What does 'shifting the curve' mean in economic terms?

Answer 30

A change in the supply or demand that affects the overall market equilibrium ## Footnote This can indicate changes in economic conditions such as increased production capacity.

Question 31

What is meant by an increase in workforce size?

Answer 31

Increase in labor due to immigration ## Footnote Immigration can lead to a larger workforce, potentially enhancing economic productivity.

Question 32

What does an increase in quantity of labor refer to?

Answer 32

More workers available for employment ## Footnote This can result from factors such as immigration or population growth.

Question 33

Define investment in economic terms.

Answer 33

Spending on capital by firms for new machinery ## Footnote Investments are critical for increasing production capacity and efficiency.

Question 34

What is the effect of investment on long-run cost of production?

Answer 34

Reduces long-run cost of production ## Footnote Increased efficiency from new machinery can lower costs over time.

Question 35

How do infrastructure improvements affect long-run costs?

Answer 35

Reduces long-run costs by making transportation cheaper ## Footnote Better infrastructure can lead to lower costs in accessing materials and distributing goods.

Question 36

What is the impact of transport infrastructure on economic activity?

Answer 36

Makes transportation cheaper and improves access to materials ## Footnote Efficient transport systems enhance trade and reduce costs for businesses.

Question 37

What are examples of physical infrastructure improvements?

Answer 37

Schools, hospitals, and transportation systems ## Footnote These improvements can be viewed as an increase in the quantity of capital.

Question 38

What happens when competition increases in a market?

Answer 38

Firms must reduce their long-run costs to remain competitive ## Footnote Increased competition can lead to more efficient production processes.

Question 39

How does increased competition affect productivity?

Answer 39

Boosts productive efficiency and shifts LRAS to the right ## Footnote Enhanced productivity can lead to economic growth.

Question 40

What is the significance of discovering new resources?

Answer 40

Can lead to economic growth and shifts in production capabilities ## Footnote New resources can provide a competitive advantage and lower costs.