As a nation's economy recovers from a deep downturn, policymakers face the delicate task of balancing expansionary monetary policy with price stability. Initially, rising consumption and business confidence can drive a recovery in real GDP. However, if aggregate demand is allowed to expand too rapidly without a corresponding expansion in the economy's supply-side capabilities, inflation will inevitably accelerate. When labor shortages appear and factories run at maximum utilization, further demand increases merely drive up prices. (Lines 1–6)
Sustainable growth requires a continuous expansion of the nation's potential output (Line 7). This cannot be achieved solely through domestic demand management. Rather, it requires targeted capital investment, structural reforms in the labor market, and technological innovation to boost worker efficiency. Encouraging research and development (R&D) and offering tax incentives for green technology investments are critical to lifting the growth ceiling. (Lines 8–13)
Define the term 'potential output' (Extract A, line 7).
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.