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Economic Growth & Government Policies

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Economic Growth & Government Policies

Read the fictional economic briefing and use the data to evaluate policy choices. All dollar figures are New Zealand dollars (NZ$). Give reasons for your conclusions.

Briefing: the Kōwhai slowdown

Kōwhai is a fictional Aotearoa New Zealand region. After a fall in export demand, some businesses reduced production and workers’ hours. The regional council and central government are considering a temporary infrastructure programme: repairing bridges and improving bus routes. Supporters expect the work to create jobs and make it easier for people and goods to travel. Critics are concerned about borrowing costs, construction delays and whether the projects will deliver lasting value. The Reserve Bank sets the Official Cash Rate (OCR) to influence interest rates and inflation; it does not choose government spending. Economic growth is commonly measured by the change in real GDP, which adjusts for price changes. Real GDP per person can give a different picture from total real GDP.

Indicator

Year 1

Year 2

Year 3

Real GDP growth

2.0%

−1.0%

1.5%

Population growth

1.0%

1.2%

1.0%

Unemployment rate

4.5%

6.0%

5.5%

Inflation rate

3.0%

5.2%

3.4%

Read the evidence

Use the briefing and table to interpret what is happening in Kōwhai.

1.In your own words, explain why economists use real GDP rather than nominal GDP to measure economic growth over time.

2.Which year in the table shows a contraction in real GDP, and what evidence identifies it?

3.In Year 3, real GDP grew by 1.5% while the population grew by 1.0%. Estimate real GDP growth per person using the simple difference between the two rates. What does your estimate suggest?

4.Unemployment falls from 6.0% in Year 2 to 5.5% in Year 3, but remains above Year 1’s 4.5%. What is one reasonable conclusion?

The labour market has improved but has not returned to its Year 1 position.
Every person who was unemployed in Year 2 now has a job.
Inflation must have fallen to zero.
The region has no remaining economic problems.

5.Inflation rises to 5.2% in Year 2 as real GDP contracts. Explain why this combination could make policy decisions difficult.

Choose and evaluate policy

Distinguish who makes each decision, then apply the ideas to the Kōwhai scenario.

6.Match each policy area to the action most directly associated with it.

Fiscal policy
Monetary policy
Trade policy

Reserve Bank adjusts the OCR to influence interest rates and inflation
Government changes spending or taxation
Government negotiates rules or agreements affecting international trade

7.The government funds bridge repairs and bus-route improvements. Identify the policy type and describe one likely short-run effect on aggregate demand.

8.A minister proposes lowering interest rates to boost spending. Who sets the OCR in New Zealand, and through what general channel can a lower OCR affect the economy?

9.Give one possible benefit and one possible cost or risk of the infrastructure programme. Explain who might experience each.

10.Recommend whether the government should proceed with the programme as planned, change it, or delay it. Use at least two pieces of evidence or ideas from this worksheet, and acknowledge one uncertainty or trade-off.