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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

Which of the following is most likely to raise the long-run trend rate of economic growth rather than just shift the economy along the business cycle?

Sustained investment in infrastructure and education raises productivity and productive capacity, so it lifts the long-run trend growth rate. Tax cuts, transfers, rate cuts and a temporary export rise mainly shift aggregate demand and affect the cycle only temporarily.

  1. AA temporary cut in income tax to stimulate spending
  2. BA one-off rise in government transfer payments
  3. CSustained investment in infrastructure and education that raises productivityCorrect
  4. DA fall in the repo rate that boosts credit demand for a year
  5. A temporary rise in exports caused by a weak currency

Explanation

Long-run growth depends on expanding productive capacity: capital, labour quality and technology. Sustained infrastructure and education spending does this. The other options mainly change aggregate demand temporarily and move actual output relative to potential.

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