Following a prolonged period of stagnation, the central bank observed a sharp divergence between short-term expansion and the nation’s long-term trajectory. While consumer spending has spiked due to temporary fiscal stimulus, the underlying rate of productive capacity expansion remains subdued. To prevent destabilising fluctuations, macroeconomic policy must align short-term demand-driven expansions with the underlying trend rate of economic growth (Line 6).
If actual growth exceeds this sustainable benchmark for too long, positive output gaps emerge, triggering wage inflation and supply chain bottlenecks. Conversely, when actual growth falls below this path, spare capacity develops. Stabilising these cyclical fluctuations is essential for long-term planning, ensuring that productivity-boosting investments in physical capital and digital infrastructure are not derailed by periodic downturns. (Lines 7–12)
Define the term 'trend rate of economic growth' (Extract A, line 6).
