2.5.4 The impact of economic growth Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. A benefit of economic growth to consumers is that:

   • consumers face fewer choices because firms produce less variety
   • consumers pay more tax, which always reduces their spending power
   • real incomes fall as the economy expands, because prices rise faster than wages
   • higher real incomes can raise living standards through greater access to goods and services

2. Economic growth may benefit firms by:

   • increasing demand for their products, which can raise revenues and encourage investment
   • reducing demand for their products, which lowers costs and profits, because firms that sell less can cut production costs faster
   • removing all competition, so firms can raise prices without limit, because growth allows the largest firms to drive every rival out
   • raising the cost of capital, which discourages all new investment, because growing economies always see interest rates rise for firms

3. Growth may benefit the government by:

   • making public borrowing more expensive because growth lowers interest rates
   • reducing tax revenues because incomes rise and so tax rates must fall
   • increasing welfare spending because fewer people need jobs
   • increasing tax revenues and reducing the cost of welfare, which can improve public finances

4. A cost of growth to the government is that it may:

   • be unable to fund any public services, because growth reduces tax receipts since higher incomes always lead to lower tax payments
   • face lower demands for public services as incomes rise, because richer households rely less on health care, schools and public transport
   • need to spend more on infrastructure and public services to cope with rising demand
   • lose all tax revenue from firms that become more profitable, because higher profits are usually exempt from tax in a growing economy

5. Economic growth can improve future living standards mainly through:

   • investment in capital and technology, which raises productive capacity and future output
   • higher consumption in the present with no effect on future output
   • reduced saving and investment, which keeps current living standards high
   • a fall in productivity that reduces the costs of production

6. Which is a potential cost of growth to future living standards?

   • an increase in the stock of natural resources available to future generations
   • depletion of finite natural resources and damage to the environment, which may reduce future welfare
   • a permanent improvement in the capacity of the economy with no costs, because growth creates lasting capacity without using up resources
   • a rise in the quality of the environment for future generations, since higher output always leads to cleaner air and water in the long run

7. A rise in economic growth is most likely to affect inequality by:

   • reducing income gaps only among the very richest households, since growth tends to reduce the share of income held by the top one per cent
   • having no effect on the distribution of income in any circumstances, because growth raises all incomes in exactly the same way
   • widening income gaps if the gains of growth are concentrated among higher-income groups
   • eliminating all income differences automatically in every economy

8. Which is a cost of economic growth for consumers in the short term?

   • a fall in the level of income, which reduces consumption spending, because growth in output leads to lower wages for most workers
   • a rise in unemployment that leaves more people with higher income, because growth attracts workers into jobs with lower pay
   • falling prices in every sector, which reduces real purchasing power, because growth in supply pushes prices down faster than wages fall
   • rising prices from inflation, which can reduce real purchasing power if wages lag behind

9. Which statement best evaluates the impact of economic growth on living standards?

   • Growth never affects living standards, because only prices matter to households and the level of output has no effect on how people live
   • Growth lowers living standards in all cases because it raises prices
   • Growth always raises living standards for every household in the same proportion, because all groups share equally in the gains from output
   • Growth can raise living standards, but the benefits depend on how income is distributed and on environmental sustainability

10. What is the effect of economic growth on the government's budget?

    • Higher tax receipts and lower welfare costs can improve the budget balance, though spending pressures may rise
    • Growth has no effect on the budget because spending is fixed by law, so tax revenue and welfare payments are unaffected by the economy
    • Growth always worsens the budget because tax receipts fall as incomes rise, since higher earnings reduce the amount of tax paid overall
    • Growth raises welfare spending in every case, so the budget always deteriorates, because more people qualify for benefits as incomes rise

11. Which best describes an opportunity cost of growth policies that focus on rapid output expansion?

    • a reduction in output in every other sector of the economy, because growth in one area draws resources away from all other sectors
    • fewer resources available for other objectives, such as environmental protection or greater income equality
    • greater resources for all objectives at once, with no trade-off required, because growth releases spare resources for every goal
    • a fall in productivity that reduces the cost of all other goods, since rapid output expansion lowers the efficiency of production

12. Which of the following is a benefit of growth for firms through innovation?

    • higher productivity and new products that allow firms to compete more effectively
    • a fall in productivity because new products require more labour
    • lower investment because innovation is always expensive to fund
    • reduced competition because innovation is banned in growing economies

13. A rise in living standards due to growth is best measured by:

    • nominal GDP alone, which ignores prices and population
    • real income per capita, adjusted for prices and population
    • the stock of government debt as a share of national output
    • the number of firms registered in the economy each year

14. Which of the following is a cost of growth associated with congestion?

    • lower traffic levels as more people use public transport, because growth encourages commuters to switch from cars to buses and trains
    • less demand for roads and fewer costs for commuters, because growing incomes allow households to move closer to where they work
    • more traffic and pressure on transport networks, which raises travel times and costs
    • a fall in the number of vehicles on the road as incomes rise, because richer households tend to give up their cars and use taxis

15. Which statement about growth and the future is most accurate?

    • Growth should always be maximised today, with no regard for future generations
    • Future living standards are unaffected by present resource use, because technology will always replace any resource used up in production
    • Growth is irrelevant to future welfare because technology will solve all problems, so the level of investment made today has no bearing
    • Sustainable growth needs investment and resource management so that future generations can also benefit

16. Which statement best describes the link between growth and employment?

    • Growth always reduces employment because machines replace all workers, so each period of rising output leaves fewer people in work
    • Growth can create jobs, but productivity improvements can also reduce labour demand in some sectors
    • Growth has no effect on employment because demand is fixed, so the number of jobs is determined by the size of the population alone
    • Growth always raises employment equally in every sector and region, because output gains are shared out evenly across the economy

17. Which of these is a benefit of growth for public services?

    • reduced demand for public services as incomes rise in every case
    • higher unemployment that raises welfare claims and so cuts public services
    • greater tax revenue that can fund better health and education services
    • lower government revenues that reduce spending on schools and hospitals

18. Which is a likely effect of economic growth on the housing market?

    • higher demand for housing can push up house prices and reduce affordability
    • fewer households wanting housing as incomes rise
    • no change in housing demand because incomes do not affect housing
    • falling house prices as incomes rise across the economy

19. Economic growth can reduce absolute poverty most effectively if:

    • poorer households are excluded from the labour market as growth continues
    • the incomes of poorer households rise with the average, through jobs and public provision
    • growth is accompanied by rising inequality in every case
    • prices rise faster than incomes for the poorest households only

20. Which best explains why the benefits of growth can be unevenly distributed?

    • gains depend on who owns capital and on whether people have the skills demanded by growing sectors
    • growth only benefits workers with no skills and no savings
    • growth gains are always passed to government as tax and never to households, so households see no benefit from any increase in output
    • all households receive identical shares of growth gains by law

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