Macro 12 - Causes/consequences of economic growth

Question 1

Show using a diagram how, in the short run, an economy with spare capacity can experience economic growth by increasing AS

Answer 1

Question 2

Show using a diagram how, in the short run, an economy with spare capacity can experience economic growth by increasing AD.

Answer 2

Question 3

What are the 6 benefits of economic growth?

Answer 3

1. Better living standards
2. Less unemployment
3. Increased government spending
4. Investment
5. Environmental protection
6. Reduced government debt

Question 4

How does economic growth result in better living standards?

Answer 4

Economic growth,
More income,
greater purchasing power,
Access to normal luxuries,
Such as healthcare and education

Question 5

Why might economic growth not result in better living standards?

Answer 5

Income may not be fairly distributed
Inflation may mean that purchasing power doesn’t increase

Question 6

How does economic growth result in less unemployment?

Answer 6

Economic growth,
More income,
More spending,
More consumption,
AD increases as consumption is 60% if AD
Firms experience more demand,
Firms hire labour as labour is derived demand

Question 7

Why might economic growth not result in less unemployment?

Answer 7

Wages may increase, meaning firms have higher costs of production and may not hire more labour

People may save instead of spend

Question 8

How does economic growth result in increased government spending?

Answer 8

Economic growth,
More income,
More income tax gathered by government,
Government spending could increase,
on capital and healthcare etc,
AD increases,
Multiplier effect as there is further economic growth

Question 9

Why might economic growth not result in increased government spending?

Answer 9

• Regional inequality
• If government uses money to invest in short term projects, like increasing teacher’s wages, then AD will increase
• However, economists are in the view that longterm projects such as building roads and airports are more beneficial, which encourage investment.

Question 10

How does economic growth result in increased investment?

Answer 10

Economic growth,
increased income,
Spending increases,
Consumption increases,
Animal spirits are high so there is more investment,
thus there is more capital available,
meaning firms can produce more as profit is main incentive,
Accelerator effect occurs

Question 11

Why might economic growth not result in increased investment?

Answer 11

If growth is not sustained, then animal spirits may decrease. This is likely to happen as Uk has productivity puzzle due to lack of investment.

Investment may only go to the south such as London, causing regional inequality

Question 12

How does economic growth result in environmental protection?

Answer 12

Deindustrialisation

Question 13

Why might economic growth not cause more environmental protection?

Answer 13

Renewable energy is expensive

Problem gets shifted to developing countries

Question 14

How does economic growth result in reduced government debt?

Answer 14

Income tax is the largest source of tax revenue for UK government,
Government get more tax revenue,
Government choose to pay off debt

Question 15

What are the 4 costs of economic growth?

Answer 15

1. Inflation
2. Current account deficit
3. inequality
4. Pollution

Question 16

How does economic growth result in inflation?

Answer 16

Economic growth,
AD increases faster than AS,
Firms struggle to keep up with demand,
this results in excess demand,
this is shown by the diagram as the economy grows closer to full capacity, resulting in demand-pull inflation

Question 17

Evaluate why economic growth results in inflation.

Answer 17

Depends what stage the economy is operating in,
In a boom inflation could be high,
In a recession inflation will remain low

Inflation is likely to be made worse by UK’s current situation on inflation compared to other developing countries

Question 18

Why does economic growth result in a greater current account deficit?

Answer 18

Economic growth,
Income increases,
Spending on Imports increases,
Net exports decreases,
Trade deficit becomes wider,

Question 19

Why might economic growth not result in a greater current account deficit?

Answer 19

Exports may limit current account widening

Question 20

How does economic growth result in increased inequality?

Answer 20

Economic growth,
there is a positive relationship between rates of economic growth and levels of inequality,
For example, India and China have seen increased rates of inequality,
The top 10% of households income increases faster than everyone else

Question 21

Why might economic growth not mean increased inequality

Answer 21

Increased tax revenue can be used to invest in capital, improving living standards

Could still reduce poverty

Question 22

How does economic growth lead into increased pollution?

Answer 22

Economic growth,
increased consumption,
Firms increase output,
Firms invest into capital such as factories,
pollution increases

Question 23

Why might economic growth not lead to pollution?

Answer 23

As economy increases, deindustrialisation can reduce pollution and firms and governments can spend on renewable energy

Question 24

Whether or not growth is beneficial to an economy depends on:

Answer 24

1. Whether growth creates inflation
2. Whether growth is long term - (Investment in capital such as cross-railing, which increases connects central London to the outskirts of London, creating jobs.)
3. If growth is short term, ( shift in AD due to wage increase)
4. Balance of growth - too much dependence on consumption could lead to a recession if consumption falls.

Question 25

Recession definition

Answer 25

2 consecutive quarters of economic downturn

Question 26

How does a recession affect the government?

Answer 26

Lower tax revenue

Increased government spending

National insurance revenue decreases

Question 27

How does a recession affect firms?

Answer 27

Firms which supply normal luxuries with high income elasticity will see a fall in revenue

Firms who sell inferior goods will see an increase in revenue