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Chapter 7: Q.6 (page 185)

What policies can the government of a free-market economy implement to stimulate economic growth?

Short Answer

Expert verified

Policies that can be used to stimulate economic growth are demand-side policies or supply-side policies.

Step by step solution

01

Definition

Demand-side policies are the policy by which the aggregate demands of an economy is increased or decreased. Supply-side policies are the policy by which the aggregate supply of an economy is increased or decreased.

02

Explanation

To stimulate economic growth the government of a free market economy implements a policy under which tax rates are decreased or money supply in the economy is increased due to which aggregate demand curve shifts rightward or upward and to make aggregate supply curve shift rightward or upward the government gives free trade agreement, privatization, tax exemption, etc. due to which productivity increases and economic growth are achieved.

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Most popular questions from this chapter

An economy starts off with a GDP per capita of$5,000. How large will the GDP per capita be if it grows at an annual rate of 2%for 20years? 2%for 40years?

4%for 40years? 6%for 40years?

Would you expect capital deepening to result in diminished return? Why or why not? Would you expect improvements in technology to result in diminished returns? Why or why not?

Explain the difference between property rights and contractual rights. Why do they matter to economic growth?

Assume there are two countries: South Korea and the United States. South Korea grows at 4% and the United States grows at 1%. For the sake of simplicity, assume they both start from the same fictional income level, $10,000. What will the incomes of the United States and South Korea be in 20 years? By how many multiples will each country's income grow in 20 years?

Why does productivity growth in high-income economies not slow down as it runs into diminishing returns from additional investments in physical capital and human capital? Does this show one area where the theory of diminishing returns fails to apply? Why or why not?
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