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Macroeconomic Objectives (A2)

Economic growth: Actual vs potential economic growth and Causes of growth

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Actual vs potential economic growth and Causes of growth.

What you need to know

Answer each one before you reveal it.

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Key term

Distinguish actual growth from potential growth.

Key term

If an economy experiences a positive output gap, what does this suggest about inflationary pressure?

Key term

What would a negative output gap suggest about unemployment in an economy?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Distinguish actual growth from potential growth.

    Model answer

    Actual growth is a rise in real output achieved by using existing capacity more fully, shown as a movement towards the production possibility frontier. Potential growth is an outward shift of that frontier, caused by more or better factors of production.

  2. 2

    If an economy experiences a positive output gap, what does this suggest about inflationary pressure?

    Model answer

    Inflationary pressure is likely to increase as the economy is operating above its sustainable capacity.

  3. 3

    What does a negative output gap indicate?

    Model answer

    That actual output is below potential output, indicating spare capacity in the economy.

  4. 4

    What would a negative output gap suggest about unemployment in an economy?

    Model answer

    Unemployment is likely to be higher than at full employment due to spare capacity in the economy.

  5. 5

    Define the business cycle.

    Model answer

    The fluctuations in economic activity over time, with phases of expansion and contraction around the long-term trend.

  6. 6

    What is the typical definition of a recession?

    Model answer

    Two consecutive quarters of negative economic growth.

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AThe demand curve shifts to the left.
BExcess supply exists at the original price.
CPrice falls until a new equilibrium is reached.

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Actual growth means a realised increase in output.
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