2.5.1 Causes of Growth — Practice Questions

Seven original multiple-choice questions on the causes of economic growth, written to the style and difficulty of Edexcel Paper 2 Section A.

7 questions Edexcel A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 2.5.1 Causes of Growth revision notes.

1. 1. A country invests heavily in new machinery, raising the maximum output it could produce. This year's actual output is unchanged. This is

   Definition in context

   Select one answer

   A Actual growth and potential growth.

   B Actual growth but not potential growth.

   C Neither actual nor potential growth.

   D Potential growth but not actual growth.
   Show model answer

   Answer: D (Potential growth but not actual growth.). Actual growth is a rise in real GDP — what was produced. Potential growth is a rise in the maximum that could be produced.
   New machinery raises the capital stock, so the ceiling goes up: potential growth is positive. But the stem says output has not moved, so actual growth is zero.
   The two come apart in both directions. Bringing idle capacity back into use gives actual growth with no potential growth; investing in capacity that is not yet being used gives the reverse, which is this case.

   Why the other options are wrong

   • A — Actual output is explicitly unchanged, so there has been no actual growth this year.
   • B — This reverses the two. The machinery raises capacity, not this year's output.
   • C — Capacity has risen, so potential growth has certainly occurred. Only actual growth is absent.

2. 2. A country's growth over two decades is driven mainly by a sustained rise in sales to overseas buyers. This strategy is called

   Definition in context

   Select one answer

   A Actual growth.

   B Export-led growth.

   C Potential growth.

   D Trend rate growth.
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   Answer: B (Export-led growth.). Export-led growth is a strategy in which rising exports are the main engine of expansion. China's growth from the 1990s onwards is the standard example.
   It works on both sides of the model. Exports are a component of aggregate demand, so rising sales abroad raise output in the short run; the income and investment that follow can then raise productive capacity in the long run.
   The other three options describe what growth is rather than where it comes from, which is the distinction the question turns on.

   Why the other options are wrong

   • A — Actual growth is a rise in real GDP, however it was caused. It describes the outcome, not the strategy.
   • C — Potential growth is a rise in productive capacity. Again, it is a description of what changed rather than the route taken.
   • D — The trend rate of growth is an economy's long-term average growth rate, measured over a decade or more.

3. 3. A country pursues export-led growth successfully for two decades. The main risk it takes on is that it becomes

   Applied reasoning

   Select one answer

   A Less able to raise its own productivity.

   B More dependent on demand from abroad.

   C Unable to attract foreign investment.

   D Unable to raise its productive capacity.
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   Answer: B (More dependent on demand from abroad.). Building growth on exports means building it on demand the country does not control.
   A recession in its main markets, a shift in trade policy, or a change in global tastes hits the whole growth model at once — and none of those is anything the exporting country can influence. Concentration in a few products or a few markets makes it worse.
   The strategy is not thereby a bad one; it delivered extraordinary results for several East Asian economies. But it trades higher growth for greater exposure to external shocks, which is why diversification usually follows success.

   Why the other options are wrong

   • A — Export-led growth tends to raise productivity, since competing in world markets forces efficiency on domestic producers.
   • C — Successful exporters usually find foreign investment easier to attract, not harder — the growth itself is the advertisement.
   • D — The income and investment generated by export success are precisely what raise capacity over the long run.

4. 4. Table 1 sets out four changes taking place in an economy.
   Using Table 1, the change that raises potential output rather than actual output is

   Data interpretation

   Table 1: Four changes taking place in the economy

   	Change
   Change 1	A temporary rise in consumer confidence
   Change 2	A depreciation that raises export sales
   Change 3	Reform of the courts to enforce contracts reliably
   Change 4	A government spending increase during a recession

   Select one answer

   A Change 1.

   B Change 2.

   C Change 3.

   D Change 4.
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   Answer: C (Change 3.). Potential output rises only when the quantity or quality of the factors of production improves, or when they are used more efficiently.
   Reliable contract enforcement is an institutional improvement. Firms that can trust the courts will invest in projects they would otherwise avoid, because the return can be defended. More investment means more capital, and capacity rises.
   The other three all work through aggregate demand. They move the economy towards its existing ceiling rather than raising it.

   Why the other options are wrong

   • A — A temporary rise in confidence raises consumption, which is a component of AD. It brings actual output closer to capacity without changing capacity.
   • B — A depreciation raises net exports, again a component of AD. The effect on capacity is indirect at best.
   • D — Government spending in a recession is a demand-side measure aimed at closing a negative output gap.

5. 5. A government doubles its spending on adult training and apprenticeships. The policy affects the economy twice over, by raising

   Applied reasoning

   Select one answer

   A AD now and LRAS later.

   B AD now and SRAS later.

   C LRAS now and AD later.

   D SRAS now and LRAS later.
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   Answer: A (AD now and LRAS later.). Spending on a supply-side measure is still spending, and that is the part students often miss.
   In the short run the money is a component of government expenditure, so aggregate demand shifts right immediately — trainers are hired, premises rented, materials bought.
   In the long run the trainees are more productive, which raises the quality of labour and shifts LRAS right.
   So a single policy delivers a demand-side effect now and a supply-side effect later. That combination is the case for spending on skills rather than on transfers, which give the first effect without the second.

   Why the other options are wrong

   • B — SRAS shifts on changes in production costs. Better-trained workers raise capacity, which is an LRAS effect.
   • C — The order is reversed. Training takes years to raise capacity, while the spending enters AD at once.
   • D — The spending does not lower firms' current costs, so SRAS is not what moves first. AD is.

6. 6. On a production possibility frontier diagram, short-run growth and long-run growth are shown respectively by

   Applied reasoning

   Select one answer

   A A movement towards the frontier and an outward shift.

   B An outward shift and a movement towards the frontier.

   C A movement along the frontier and an inward shift.

   D An inward shift and a movement along the frontier.
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   Answer: A (A movement towards the frontier and an outward shift.). The PPF separates the two cleanly.
   Short-run growth is using more of what you already have — moving from a point inside the frontier towards it. Actual output rises; the frontier does not move.
   Long-run growth is an increase in what you could produce — the frontier itself shifts outwards. That is the same event as an outward shift in LRAS, drawn on different axes.
   The distinction matters because the first has a limit and the second does not: once the economy reaches its frontier, only an outward shift allows further growth.

   Why the other options are wrong

   • B — This reverses the two. A shift is a change in capacity, which is the long-run case.
   • C — A movement along the frontier reallocates resources between two goods without changing total capacity, and an inward shift is economic decline.
   • D — An inward shift means capacity has been lost, which is neither kind of growth.

7. 7. Long-run growth is often described as more sustainable than short-run growth. The best reason is that long-run growth

   Applied reasoning

   Select one answer

   A Always raises aggregate demand as well.

   B Cannot be reversed by an economic shock.

   C Raises capacity, so prices need not rise.

   D Requires no government intervention at all.
   Show model answer

   Answer: C (Raises capacity, so prices need not rise.). Short-run growth uses up spare capacity. As the economy approaches its ceiling, further increases in demand meet a steepening supply curve and spill into inflation rather than output — so the growth is self-limiting.
   Long-run growth moves the ceiling. Output can rise and the price level stay flat, because there is genuinely more to buy. That is why it is called non-inflationary growth, and why supply-side improvement is the only route to growth that can continue indefinitely.

   Why the other options are wrong

   • A — Long-run growth raises capacity. Whether demand keeps pace is a separate question, and if it does not the extra capacity sits idle.
   • B — Capacity can certainly be lost — to war, disaster, or skills decaying through long-term unemployment. Nothing about it is irreversible.
   • D — Much long-run growth follows directly from government action on education, infrastructure, competition and institutions.