Policies to Increase Growth & Living Standards- With Eval Flashcards
(11 cards)
What are the two types of economic growth?
Back:
Short-run (actual) growth:
An increase in real GDP due to higher demand (AD shift right)
Utilises spare capacity
Moves the economy closer to full employment
Long-run (potential) growth:
An increase in the productive capacity of the economy (LRAS shift right)
Driven by improvements in factors of production
What policies increase short-run (actual) growth?
Back:
Demand-side policies such as:
Expansionary fiscal policy – Increase G, cut T
Expansionary monetary policy – Lower interest rates, increase QE
These shift AD to the right, increasing real GDP and reducing cyclical unemployment.
Diagram: AD–AS showing AD shifting from AD1 to AD2, output rising from Y1 to Y2
Evaluate the effectiveness of demand-side policies to increase growth.
Back:
Pros:
Effective in a recession or when there’s spare capacity
Can quickly boost output and reduce unemployment
Cons:
Risk of inflation if economy is near full capacity
Budget deficit from fiscal expansion
Time lags in implementation (especially fiscal policy)
Interest rate cuts may not stimulate spending if confidence is low
What policies increase long-run (potential) growth?
Back:
Supply-side policies, which shift LRAS to the right, such as:
Education and training
Infrastructure investment
Tax reforms
Deregulation and labour market reforms
These raise productivity, capital stock, and labour force participation, boosting sustainable growth.
How does economic growth support macroeconomic objectives?
Back:
Growth: Higher GDP and living standards
Unemployment: More jobs created
Inflation: Depends—can cause demand-pull inflation if too fast
Trade balance: Growth may increase imports (worsen balance) unless export-led
Fiscal stability: Growth raises tax revenue, lowers welfare spending
What is the risk of using demand-side policies to boost growth?
Back:
Demand-pull inflation risk: If AD increases too quickly and the economy is near full capacity, inflation may overshoot the target.
Size of output gap matters:
If the gap is small, inflationary pressure is greater.
If the gap is large, there’s more spare capacity, so inflation risk is lower.
Diagram: AD shifting right with small vs large output gap scenarios
Evaluation Tip: Use phrases like: “depends on the output gap”, “state of the economy”, and “magnitude of AD shift”.
How might fiscal policy to boost growth affect government finances?
Back:
Expansionary fiscal policy may worsen the budget deficit if G increases or T is cut.
May lead to higher borrowing and rising national debt.
Crowding out effect: Higher government borrowing could raise interest rates, discouraging private investment.
Evaluation:
Depends on initial debt level and interest rates
May be justified if growth leads to higher future tax revenue
Monetary policy may avoid this issue if used instead
How does confidence affect the effectiveness of demand-side policies?
Back:
Even with low interest rates or tax cuts, if confidence is low (e.g. during a recession), households may save and firms may not invest.
This limits the multiplier effect and reduces the impact of fiscal/monetary stimulus.
Evaluation:
Policies are more effective when confidence is high
May require government credibility and forward guidance to build confidence
Why do supply-side policies take time to boost growth?
Education, training, and infrastructure take years to implement and show results.
Market reforms may also take time to restructure incentives.
Results are long-term, not immediate—less effective in addressing short-run recessions.
Evaluation:
Often politically unpopular due to delayed benefits
Needs consistency across governments
How do supply-side policies boost long-run growth?
Shift LRAS to the right, increasing potential output (Yf1 to Yf2)
Achieved through both interventionist and market-based approaches:
Education, infrastructure, R&D (interventionist)
Tax reform, deregulation, labour flexibility (market-based)
Diagram: AD–AS with LRAS shifting right from LRAS1 to LRAS2
What are the limitations of supply-side policies?
Back:
No guarantee of success – spending may not improve productivity
High cost – especially for interventionist policies, with high opportunity cost
Time lags – benefits often take years to materialise
Negative stakeholder impacts – e.g. reduced welfare, deregulation harming workers or environment
Evaluation Tip: Use real-world examples (e.g. UK apprenticeships, NHS backlog, Brexit regulatory shifts)
