Question 1

Can an economy grow too quickly?

Accepted Answer

Yes. If actual growth, driven by aggregate demand, significantly outpaces the growth in potential output (LRAS), it creates an inflationary gap. This leads to demand-pull inflation, a likely worsening of the current account deficit as demand for imports rises, and other signs of an 'overheating' economy. Such growth is often unsustainable.

Question 2

Is economic growth always beneficial?

Accepted Answer

Not necessarily. While growth can lead to higher incomes and improved public services, it can also have significant costs. These include increased income inequality, negative externalities like pollution and congestion, depletion of non-renewable resources, and non-monetary costs such as increased stress and work-life imbalance. The desirability of growth depends on its nature and how its benefits and costs are distributed.

Question 3

Does an increase in government spending always cause long-run economic growth?

Accepted Answer

No. An increase in government spending (G) boosts aggregate demand (AD), which can cause short-run 'actual' growth if the economy has spare capacity. However, it only leads to long-run 'potential' growth if the spending increases the economy's productive capacity. For example, spending on infrastructure, education, or R&D subsidies shifts LRAS to the right. In contrast, spending on welfare benefits may boost AD but has a less direct impact on LRAS.

Economic growth

What you need to know

Economic growth