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Economic Growth

Policy instruments used to create growth

  • 3 things to know
  • All three components

Overview

One criticism of using income tax cuts to raise growth and opportunity cost of a government growth strategy.

What you need to know

Answer each one before you reveal it.

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Key term

Which broad types of policy can a government use to raise growth?

Key term

How can government spending on infrastructure raise growth?

Key term

How can education policy raise the growth rate?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Which broad types of policy can a government use to raise growth?

    Model answer

    Demand side policy raises actual growth by increasing aggregate demand. Supply side policy raises potential growth by increasing productive capacity.

  2. 2

    How can government spending on infrastructure raise growth?

    Model answer

    Public investment in roads, railways and broadband lowers transport and communication costs for firms. Productive capacity rises, so potential growth increases.

  3. 3

    How can education policy raise the growth rate?

    Model answer

    Extra spending on schools, colleges and apprenticeships raises the skills of future workers. A more productive workforce raises potential output.

  4. 4

    How can tax policy be used to encourage investment?

    Model answer

    Allowances that let firms offset investment against tax lower the cost of new capital. Investment rises and the capital stock grows faster.

  5. 5

    How can lower income tax rates raise growth?

    Model answer

    Lower income tax rates raise the reward from working and may increase labour supply. Supporters argue that both participation and hours worked increase.

  6. 6

    State one criticism of using income tax cuts to raise growth.

    Model answer

    Critics point out that the income effect may lead workers to work fewer hours. Empirical evidence on the size of the labour supply response is mixed.

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BTaxation is income taken by the government.
CMoney spent on imports leaves the domestic flow.

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