In 2023, Arcania's Ministry of Finance reported that despite high initial projections, the achievement of a balanced budget has been delayed. The fiscal deficit reached 5.5% of GDP in the wake of recent supply-side shocks and slow productivity growth.
However, the Fiscal Advisory Council noted that if real GDP growth rises from its current sluggish 0.8% to a trend rate of 2.5%, the automatic stabilizers will work much more effectively. If economic growth can be sustained at a higher rate, the budget deficit will shrink rapidly without requiring further painful austerity measures.
Extract F states: "If economic growth can be sustained at a higher rate, the budget deficit will shrink rapidly..."
With the help of a diagram, explain why a higher rate of economic growth is likely to reduce the budget deficit.
245 exam-style questions on AQA A Level Economics 2.5 Fiscal policy and supply-side policies, covering 2.5.1 Fiscal policy and 2.5.2 Supply-side policies. Each one has a worked solution and a mark scheme showing where the marks go.