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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

Which of the following is an example of a long-run factor that raises an economy's potential growth rate, as opposed to a short-run cyclical movement?

Sustained investment in education and capital equipment raises productivity and therefore the economy's potential output, so it increases long-run growth. Temporary rate cuts, oil price falls, festival spending or inventory builds only move demand in the short run and cause cyclical changes.

  1. AA temporary cut in interest rates that boosts consumer spending for one year
  2. BA one-off fall in oil prices that raises demand this quarter
  3. CA sustained rise in investment in education and capital equipment that increases productivityCorrect
  4. DA seasonal increase in retail spending during festivals
  5. A temporary inventory build-up by manufacturers

Explanation

Potential growth depends on supply-side factors such as the quantity and quality of labour, capital and technology. Sustained investment in skills and equipment raises productivity and shifts potential output upward. The other options affect demand temporarily and mainly cause cyclical fluctuations.

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