Causes of growth

• What is economic growth defined as?

  An increase in real GDP in an economy in a year.
• What are the two causes of economic growth mentioned in the definition?

  An increase in aggregate demand or an increase in long-run aggregate supply.
• What is short-run growth also known as?

  Actual growth.
• What happens to the economy during short-run growth?

  The economy uses up spare capacity to increase the output of goods and services.
• How can short-run growth be illustrated on an AD-AS diagram?

  By shifting aggregate demand to the right.
• What does a shift of aggregate demand to the right indicate on the AD-AS diagram?

  It indicates that the economy is closing a negative output gap.
• What does a negative output gap represent?

  It represents the economy operating below its productive potential.
• How can short-run growth be shown on a PPF diagram?

  By moving from a point inside the PPF towards the PPF boundary.
• What does the AD equation consist of?

  AD = C + I + G + (X - M).
• What does 'C' represent in the AD equation?

  Consumer spending.
• What does 'I' represent in the AD equation?

  Investment.
• What does 'G' represent in the AD equation?

  Government spending.
• What does '(X - M)' represent in the AD equation?

  Net exports.
• What are some factors that can increase aggregate demand?

  Lower interest rates, lower income tax, and higher consumer confidence.
• How do lower interest rates affect consumer spending?

  They make it cheaper for consumers to borrow, increasing spending.
• What is long-run growth also known as?

  Potential growth.
• What does an increase in long-run aggregate supply indicate?

  An increase in the productive capacity of the economy.
• How can long-run growth be illustrated on an AD-AS diagram?

  By shifting the long-run aggregate supply curve to the right.
• What does a shift of the PPF curve outward represent?

  An increase in long-run aggregate supply.
• What are the three reasons why the long-run aggregate supply curve can shift to the right?

  An increase in the quantity of factors of production, an increase in the quality of factors of production, or an increase in productive efficiency.
• What does an increase in labor productivity indicate?

  An increase in the quality of labor.
• How can an increase in the workforce size affect long-run aggregate supply?

  It can shift the long-run aggregate supply curve to the right.
• What is the effect of investment on long-run aggregate supply?

  Investment increases the quantity and quality of capital, shifting the curve to the right.
• How do infrastructure improvements affect long-run aggregate supply?

  They reduce long-run costs of production and can increase the quantity of capital.
• How does increased competition affect long-run aggregate supply?

  It boosts productive efficiency and shifts the curve to the right.
• What happens when new resources are discovered in terms of long-run aggregate supply?

  It increases the quantity of land, shifting the curve to the right.
• What are the key differences between short-run growth and long-run growth?

  • Short-run growth (actual growth) is caused by an increase in aggregate demand.
  • Long-run growth (potential growth) is caused by an increase in long-run aggregate supply.
  • Short-run growth utilizes spare capacity, while long-run growth increases productive capacity.
• What are the specific causes of long-run growth?

  • Increase in the quantity of factors of production.
  • Increase in the quality of factors of production.
  • Increase in productive efficiency.
• What are examples of investment that can lead to long-run growth?

  • Spending on new machinery.
  • Upgrading existing technology.
  • Expanding factories.
  • Investing in research and development.
• How do infrastructure improvements contribute to long-run growth?

  • They reduce long-run costs of production.
  • They improve access to raw materials.
  • They can increase the quantity of capital.
• What role does competition play in long-run growth?

  • It boosts productive efficiency.
  • It encourages firms to reduce costs.
  • It can lead to innovation and better products.