Economic Growth

7
Multiple Choice
1 C* 6 D* 11 C* 16 A*
2 B* 7 C* 12 C 17 D*
3 C* 8 A 13 A 18 B*
4 B 9 B 14 D* 19 A*
5 B* 10 A 15 B 20 A

*Indicates that an enhanced answer has been provided in the section below.

Enhanced Answers

1 C For an economy to be in equilibrium, injections must equal leakages. If injections are greater than
leakages, the economy will grow. If injections are less than leakages, the economy will shrink. Only
when injections are equal to leakages will the economy be in equilibrium.
2 B Domestic slowdown means imports will decrease. An overseas boom in two of Australia’s major
trading partners would see Australian exports increase.
3 C Need to calculate the multiplier. k = 1/(1 − MPC), k = 1/0.5, k = 2. Government spending increase
multiplied by k = $25 billion x 2 = $50 billion.
5 B k = 1/MPS, k = 1/0.4, k = 2.5. Increase of $20 billion × k = $50 billion.
Existing GDP $800 billion + $50 billion = $850 billion.
6 D Policies that increase disposable income are likely to increase consumption and hence economic
growth. Lower income earners tend to have a higher marginal propensity to consume than higher
income earners, so policies that increase the income of lower income earners are most likely to
accelerate economic growth. On the other hand, imports and taxation are leakages from the
economy, and all else being equal, an increase in leakages will reduce economic growth.
7 C To calculate real GDP use the formula: real GDP = nominal GDP × CPI (previous year)/CPI (current
year).
Country A real GDP is $521.7 billion, Country B is $571.4 billion.
Country A HDI is 0.845, Country B HDI is 0.905.
Therefore, Country B has a higher real GDP and greater level of development as shown by HDI.
11 C Lower MPC means a lower multiplier. A lower consumption and higher savings will lead to a lower
level of economic activity and a lower equilibrium income.
14 D From Year 1 to Year 2, change in Y was 100, while change in C was 60.
MPC = change in C/change in Y. Therefore MPC = 0.6.
To calculate multiplier use the formula k = 1/(1 − MPC). Therefore k = 1/0.4, K = 2.5.
16 A Firstly, we can calculate MPS from the table. MPS = change in S/change in Y = 100/500 = 0.2.
If national income rises to $3200 billion in 2025, this is an increase of $200 billion relative to 2024.
Again, as MPS = change in S/change in Y, 0.2 = change in S/200, so change in S = 40.
So in 2025, income = $3200 billion, saving = $440 billion ($400 billion + $40 billion).
Income = consumption + saving, $3200 = consumption + $440, so consumption = $2760 billion.

© Pearson Australia | www.pearsonplaces.com.au 9780655709350 1

 Australia in the Global Economy Workbook Eleventh Edition  Chapter 7: Economic Growth

17 D This question requires the simple multiplier formula in reverse.

Change in Y = Change in aggregate demand × k
$225 billion = $45 billion × k
$225 billion/$45 billion = k = 5
After finding the multiplier, use the formula to find MPS.
k = 1/MPS
5 = 1/MPS
5 × MPS = 1
MPS = 1/5 = 0.2
18 B AD = C + I + G + X − M.
If everything else stays equal, the change in AD = change in G − change in M.
Hence the change in AD = $10 billion − $15 billion = −$5 billion.
The multiplier is calculated by k = 1/MPS = 1/0.4 = 2.5.
Change in national income = k × change in aggregate demand = 2.5 × −$5 billion = −$12.5 billion.

19 A Gross domestic product per capita is a country’s economic output per person. This is calculated
by: GDP/population.
Year 1 = $380 billion/48 million = $7917
Year 2 = $450 billion/55 million = $8333
Year 3 = $410 billion/62 million = $6613
GDP per capita increased from Year 1 to Year 2 but then declined sharply in Year 3.

Short Answers
Question 1

(a) Aggregate demand (the total level of expenditure in an economy) is influenced by levels of
consumption, savings, consumer expectations, the level of interest rates and the distribution
of income.
(b) An increase in the level of economic growth leads to higher living standards, meaning that
individuals are able to enjoy greater material well-being as a result of increases in their
disposable income. Economic growth also creates jobs in an economy and lowers cyclical
unemployment. Higher demand for goods and services leads firms to increase their
demand for labour as an input into production. Economic growth can also lead to higher
levels of investment in an economy as business expectations improve. However,
unsustainable increases in economic growth may also have negative consequences. If
demand outstrips supply, this is likely to lead to higher inflation and faster growth in imports
than exports, thus worsening the current account balance. Increased economic growth can
also lead to a faster depletion of non-renewable resources and environmental harm.
(c) Aggregate supply represents the economic potential of an economy. Lifting aggregate
supply is important for sustainable long-term economic growth. Aggregate supply can
increase if there is an increase in the level of output that can be produced at a given cost.
This can be achieved through increasing the quantity, or improving the quality, of factors of
production. For example, population growth (an increase in the population of working age)
can increase aggregate supply. Technological changes that improve the efficiency of
production also increase aggregate supply. Infrastructure improvements (such as faster
transport links and broadband speeds) can increase productivity and therefore lift
aggregate supply.

Question 2

(a) The simple multiplier for this economy is: k = 1/(1 − MPC) = 1/(1–0.8) = 5.0
(b) Increase in Y = k × change in I = 5 × $10bn = $50bn
(c) For national income to reach $1500 billion would require an increase of $300 billion. Using
the formula above, we know that:
Increase in Y = k x change in I
Substituting these numbers into the equation: $300 billion = 5 x change in I
Therefore:
Change in I = $60 billion.

© Pearson Australia | www.pearsonplaces.com.au 9780655709350 2

 Australia in the Global Economy Workbook Eleventh Edition  Chapter 7: Economic Growth

(d) The multiplier determines the size of the overall increase in national income resulting from
an initial increase in aggregate demand. An increase in the simple multiplier will mean that
a change in the level of aggregate demand will now have a larger effect on the level of
national income. If aggregate demand increases, for example through an increase in
investment, the level of national income will increase by a larger amount. If aggregate
demand decreases, the level of national income will decrease by a larger amount. This
means that the economy is now more susceptible to external shocks like changes in net
exports; however, national income is now also more responsive to government fiscal policy.
(e) Economic growth has many positive impacts on the Australian economy. Two of these are
increasing employment and improving living standards. Economic growth creates jobs, and
higher economic growth is associated with the development of new and more advanced
industries, which can lead to more highly paid and highly skilled jobs. With more people
employed, including on higher incomes, disposable incomes increase, and people
experience a higher standard of living.

Question 3

(a) A decrease in consumer confidence, for example, due to an expectation that economic
growth will slow in the near future, will decrease the average propensity to consume and
therefore decrease the total level of consumption. An increase in interest rates will also lead
to a decrease in consumption. Higher interest rates discourage consumers from borrowing
(for consumer spending, housing etc) and also make saving more attractive, thus reducing
consumption.
(b) The government may use macroeconomic policy to raise the level of aggregate demand
and increase economic growth in the short to medium term. The government can use
expansionary fiscal policy, either by increasing government expenditure or reducing
taxation, to increase aggregate demand. The multiplier effect states that this initial increase
in government spending will increase disposable incomes, leading to higher consumption
and a much larger overall expansion of aggregate demand. The government may also use
monetary policy to lower interest rates and boost consumption and investment in the
economy, increasing aggregate demand and economic growth. The government can also
use microeconomic policy to improve productivity, efficiency and international
competitiveness in the economy. This would increase the level of aggregate supply and
increase economic growth in the long term. Examples of microeconomic policy include
National Competition Policy, labour market reforms and deregulation of the financial sector.
(c) The business cycle involves the rise and fall in the general level of economic activity over
time. Changes in the levels of aggregate supply and demand lead to fluctuations in the
business cycle between periods of stronger economic growth (booms) and periods of
decreased or negative growth (recessions). While the Australian economy has experienced
both booms and recessions, the underlying rate of economic growth in recent years has
averaged around 2 to 3 per cent. In the early 1990s, the Australian economy went through
a recession, but then experienced relatively strong economic growth through the 1990s and
into the 2000s. Australia experienced a sudden slowdown of growth during the global
financial crisis of 2008 and 2009, but avoided recession, and then experienced a slow but
relatively stable growth rate throughout the 2010s. In fact, Australia achieved a world record
of 28 years’ continued economic growth between 1991 and 2019 – the longest unbroken
period of economic growth of any developed country in recorded history – which only
ended in 2020 with the strict lockdowns to control the onset of COVID-19. The sharp
downturn in the business cycle in 2020 was followed by a rapid recovery and a return to
modest growth rates. While there was less volatility in growth rates during the 2010s (until
the COVID-19 slump in 2020), the underlying rate of economic growth slowed during this
decade.

© Pearson Australia | www.pearsonplaces.com.au 9780655709350 3

 Australia in the Global Economy Workbook Eleventh Edition  Chapter 7: Economic Growth

Skills Revision Answers

Left-hand column
(a) I+G+X=S+T+M
25 + G + 35 = 110 + 55 + 60
G + 60 = 225
G = 165

(b) I+G+X=S+T+M
65 + 65 + X = 66 + 90 + 22
X + 130 = 178
X = 48

(c) I+G+X=S+T+M
20 + 85 + 70 = 40 + T + 45
175 = 85 + T
90 = T
T = 90

Right-hand column
(d) AD = C + I + G + X – M
125 = 20 + 25 + 60 + X – 30
125 = 75 + X
50 = X
X = 50

(e) At equilibrium AS = AD
AD = C + I + G + X – M
Therefore
AS = C + I + G + X – M
95 = 15 + I + 10 = 35 –25
95 = 35 + I
60 = I
I = 60

(f) At equilibrium AS = AD
AD = C + I + G + X – M
Therefore
AS = C + I + G + X – M
AS = 34 + 75 + 90 + 37 – 37
AS = 199

© Pearson Australia | www.pearsonplaces.com.au 9780655709350 4

 Australia in the Global Economy Workbook Eleventh Edition  Chapter 7: Economic Growth

Skills Revision Answers

1 Aggregate demand can be calculated by the formula AD = C + I + G + X − M
In Economy A, AD = 50 + 20 + 30 + 40 − 15 = 125
In Economy B, AD = 40 + 10 + 70 +15 − 60 = 75
Hence, aggregate demand is higher in Economy A.

2 MPS = 1 − MPC
In Economy A, MPS = 1 − 0.2 = 0.8
In Economy B, MPS = 1 − 0.75 = 0.25
Hence, Economy A has the higher MPS.

3 k = 1/MPS
In Economy A, k = 1/0.8 = 1.25
In Economy B, k = 1/0.25 = 4
Hence, Economy A has the lower multiplier.

4 Leakages = S + T + M
In Economy A, leakages = 60 + 15 + 15 = 90
The value of leakages in Economy A is $90 billion.

5 Injections = I + G + X
In Economy B, injections = 10 + 70 + 15 = 95
The value of injections in Economy B is $95 billion.

6 Change in Y = k × change in AD
In this case, we increase AD by increasing government spending. The increase in government
spending required to achieve an increase in national income (AD) of $100 billion in Economy
A can be calculated by:
100 = 1.25 × change in government spending
Change in government spending = 100/1.25 = 80
Hence, an increase in government spending of $80 billion is required in Economy A to
increase national income by $100 billion.

7 Change in Y = k × change in AD
In this case, AD falls because of the decrease in exports. The resulting decrease in national
income in Economy B can be calculated by:
Change in Y = 4 × (−50) = −200
Hence, a fall in exports of $50 billion would result in a fall in national income of $200 billion in
Economy B.

© Pearson Australia | www.pearsonplaces.com.au 9780655709350 5