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Economic Growth - Worksheet

There is one worksheet available for economic growth. The worksheet looks at what creates economic growth and the costs there may be from economic growth that is too fast. It then goes on to suggest some experiments with the Virtual Economy model to see how economic growth reacts to different policy changes.

Step 1 - The roller-coaster of growth

The economy doesn't grow regularly, it tends to grow in cycles. This cycle is usually called the trade cycle. Use the theory section on GDP to find out the reasons why this happens.

Reasons for trade cycle?

1.

What are the main sources of economic growth? What conditions are necessary for the economy to grow successfully? (N.B. You may find the theory section on growth helpful in answering this)

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Step 2 - High growth good, low growth bad?

Use the theory section on growth to find out the costs that may result from high economic growth.

Costs?

1.

Write a short paragraph setting out some policies the government could use to try to reduce these costs arising from growth and try to achieve sustainable growth.

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Step 3 - Demanding growth?

Economic growth can be caused by changes in the level of aggregate demand. The government could use reflationary policies to try to achieve this.

What would reflationary fiscal policies be?

1.

What would reflationary monetary policies be?

1.

Show the impact of these policies on the diagram below:

Now try this on the model to see if it changes as you expect. Go to the model and try a significantly reflationary policy. You may want to try the following:

• Decrease income tax (perhaps 1% - lower rate, 2% - basic rate and 3% - top rate?)
• Increase government expenditure (perhaps by 10%)
• Reduce interest rates (perhaps by 2%?)

Note the effects down in the table below:

Year	2000	2001	2003	2005	2008
Economic growth - before policy changes
Economic growth - after policy changes

Were the effects as expected? If not how did they differ?

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What problems for the economy have resulted from these policies?

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Step 4 - Supplying growth?

What is meant by supply-side policies?

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Show the effect of supply-side policies on the diagram below:

Note down some examples of supply-side policies. (You may find the growth theory section helpful).

1.

Not all these policy changes are possible in the Virtual Economy model. In the selected variables version of the model, you have control over:

• Government expenditure
• Income tax
• VAT
• Interest rates

What could you do with these variables that would help the supply-side of the economy?

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Now go to the selected variables model and try these changes. Note down below the effect they have had on the level of economic growth:

(N.B. Ensure that any changes you make to taxation are "revenue-neutral". i.e. reduce government expenditure by the same amount as your tax cuts. This will isolate out any demand-side effects)

Year	2000	2001	2003	2005	2008
Economic growth - before policy changes
Economic growth - after policy changes

Step 5 - Tell Gordon

Write a report to Gordon Brown setting out the measures you think he should take in the next budget to increase both the short-term and long-term levels of economic growth. Take into account how effective the policies you tried above were in boosting growth.

(N.B. Any recommendations should ensure non-inflationary growth)

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