2.5.1 Causes of growth Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Actual economic growth is best defined as:

   • the percentage increase in nominal GDP caused by rising prices
   • the change in the long-run trend of growth rates over decades
   • the percentage increase in real output actually produced in the economy over a period
   • the percentage increase in the economy's maximum productive capacity over a period

2. Potential economic growth refers to:

   • an increase in the economy's productive capacity, shown by an outward shift of the LRAS curve
   • a temporary rise in output caused by a boom in consumer spending, which lifts actual output above its trend for a short period of time
   • a rise in the price level caused by excess demand
   • an increase in aggregate demand caused by a fall in interest rates

3. Which factor is most likely to increase the economy's capital stock?

   • a fall in the rate of saving that reduces funds for investment
   • a fall in investment that lowers depreciation
   • higher gross investment in machinery, infrastructure and buildings
   • a rise in consumption spending in the short run

4. Export-led growth is best described as:

   • growth driven by a fall in exports that reduces imports, which lowers the demand for foreign currency and raises output
   • growth caused by a fall in the exchange rate, which lowers foreign demand so domestic firms sell less abroad but produce more at home
   • growth driven entirely by government spending on defence, which raises demand for domestic output without any trade effects
   • growth driven by rising demand for a country's exports, which can raise output and encourage productivity improvements

5. Which of the following best explains why international trade can support economic growth?

   • It allows specialisation according to comparative advantage and access to larger markets, raising productivity
   • It stops firms from using new technologies and skills, so domestic producers keep their existing methods and grow at a steady pace
   • It removes competition so that firms can raise prices without limit, which lets them invest their extra profits in new products
   • It only raises consumption in the short run, since imported goods are used up quickly and do not add to productive capacity

6. Which statement about the relationship between actual and potential growth is most accurate?

   • Actual and potential growth are identical in every year by definition, so the two only differ when statistics are revised or mismeasured
   • Actual growth can never exceed potential growth in any period, because output is always capped at the economy's productive capacity
   • Potential growth is always higher than actual growth in a boom, since firms expand capacity faster than they use it when demand is strong
   • Actual growth can temporarily exceed potential growth during a boom, which can create inflationary pressure

7. If an economy's potential output grows by 2% a year and actual output grows by 4% in one year, what is the most likely consequence?

   • A negative output gap opens up, which will reduce inflation
   • The output gap stays zero because actual growth must equal potential growth
   • A positive output gap opens up, which may create inflationary pressure
   • The economy's potential output falls to match actual output

8. Which factor is most likely to raise the economy's potential output in the long run?

   • a short-run fall in interest rates that boosts consumer spending
   • a temporary rise in government borrowing to finance consumption
   • research and development leading to new technologies that raise productivity
   • a temporary rise in export demand due to a weak currency

9. Why might a rise in migration raise potential economic growth?

   • It can increase the size and skills of the labour force, which raises the economy's productive capacity
   • It reduces the labour force by taking jobs from existing workers, so the number of people producing goods falls over time
   • It lowers potential output because migrants do not spend on goods, so demand for domestic firms' output falls in every sector
   • It has no effect because only domestic workers contribute to output, and migrants simply consume existing goods

10. Which statement best evaluates the view that a rise in export demand always boosts long-run growth?

    • Export demand never affects growth because it is a component of AD only, so it moves output in the short run without any long-run effect
    • Export demand always boosts long-run growth in every economy, because higher foreign sales automatically raise productivity and capacity
    • Export demand helps growth only if it leads to productivity gains or investment, not if it simply uses up spare capacity
    • Export demand reduces growth in every case because exports leave the country, so goods made for foreign buyers add nothing at home

11. Which of the following would increase potential growth by improving the quality of the labour force?

    • an increase in spending on vocational training and apprenticeships
    • a fall in spending on education to reduce public borrowing
    • a rise in the minimum age for employment to reduce the labour supply
    • a reduction in incentives for workers to acquire new skills

12. An economy's actual growth rate of 2.5% is above its trend growth of 2%. What does this suggest?

    • The economy has a permanent negative output gap, because actual growth above trend always implies output is below potential
    • The economy is growing faster than its long-run trend, which may bring inflationary pressure if sustained
    • The economy's potential output has fallen by 0.5% a year, because growth above trend shows productive capacity is shrinking
    • The economy is in a deep recession with falling output, since any growth below trend shows that output has collapsed in the period

13. Which statement about investment and the rate of potential growth is most accurate?

    • Higher investment in capital, both physical and human, raises the economy's potential growth rate
    • Potential growth depends only on exchange rates and not on investment
    • Higher investment reduces potential growth by raising costs for firms
    • Investment has no effect on potential growth because it is only a demand component

14. Which of these policies is most likely to increase long-run economic growth?

    • investment in infrastructure and education that raises the productive potential of the economy
    • a rise in trade protection that reduces competition from imports, which lets domestic firms expand and so raises potential growth
    • an increase in short-run government spending on public sector pay, which raises demand for workers and lifts output this period
    • a fall in investment in research so that firms reduce costs, which leaves more funds for dividends and supports consumption

15. Which of the following is most likely to reduce an economy's potential output over time?

    • a sustained rise in investment in renewable energy technologies, which diverts resources from useful production and lowers capacity
    • a sustained fall in investment that leaves the capital stock ageing and obsolete
    • a sustained rise in the number of skilled workers, which increases labour costs and reduces the output firms produce in the long run
    • a sustained rise in productivity from new technologies, which lowers the number of workers needed and reduces the capacity to produce

16. Which statement best describes the difference between an increase in actual output and an increase in potential output?

    • Potential output rises whenever demand rises, but actual output requires new capital, so higher spending first raises capacity
    • Actual and potential output are identical, so the distinction is meaningless, because any rise in production expands the capacity used
    • Actual output can rise from higher demand alone, but potential output rises only when productive capacity expands
    • Both rise only when the exchange rate falls and the price level is constant, since a weaker currency is the only route to higher output

17. Which is an example of how a fall in trade barriers could support growth?

    • Firms face lower demand because overseas buyers prefer domestic goods, so exports fall and productive capacity shrinks over time
    • Firms face more competition and must stop investing in equipment, because cheaper imports reduce the profits firms can use to fund projects
    • Firms lose access to imports, which raises the cost of capital, because imported machinery and components become more expensive
    • Firms gain access to cheaper inputs and new markets, which can raise productivity and output

18. Which of these is an example of actual growth rather than potential growth?

    • an outward shift of the LRAS curve from better education, which raises the skills of the workforce and productive capacity
    • a permanent rise in the capital stock from new factories, which increases the volume of goods the economy can produce each year
    • a temporary boost to output from a rise in consumer spending during a boom
    • a permanent rise in labour productivity from new technology, which lifts sustainable output and shifts the LRAS curve

19. Which is most likely to raise potential growth through natural resources?

    • the discovery of new natural resources that firms can profitably extract
    • a fall in the price of energy that discourages new extraction
    • an increase in the cost of raw materials used by manufacturers
    • the depletion of existing reserves with no new investment in extraction

20. What is the main difference between growth caused by a rise in aggregate demand and growth caused by a rise in productive capacity?

    • Neither affects inflation, since only the exchange rate determines prices, so the source of growth has no bearing on sustainability
    • Both have identical effects on inflation and sustainability over time, so policy-makers can treat any source of growth the same way
    • Demand-led growth can be temporary and may generate inflation, while capacity-led growth can be more sustained with less inflation
    • Capacity-led growth is always temporary, while demand-led growth is permanent, because extra capacity wears out but extra spending lasts

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