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

Which of the following is the best example of a supply-side source of long-run economic growth, as opposed to a short-run fluctuation in aggregate demand?

Growth in the quantity and quality of capital together with a more skilled workforce is the supply-side source. It raises the economy's productive capacity and so shifts potential output outward permanently. The other options mainly boost aggregate demand and move actual output relative to trend temporarily.

  1. AA temporary cut in income tax that raises consumer spending for one year
  2. BA rise in exports caused by a one-off depreciation of the rupee
  3. CAn increase in the quality and quantity of capital and a more skilled workforce shifting potential output outwardsCorrect
  4. DA fall in interest rates that stimulates borrowing for housing
  5. A government stimulus package that increases public spending during a slump

Explanation

Long-run growth comes from increases in productive capacity: more or better capital, labour skills and technology, which raise potential output. The other options mainly shift aggregate demand and affect actual output around the trend in the short run.

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