Student 4: High Achieved
Significant and Sustainable Economic growth: Sustainable economic growth is when actions take place in
the present that will cause economic growth but does not diminish the prospects of future generation’s level
of consumption, wealth, and utility or welfare compared to the people in the present. Sustainable
economics takes greater account of the social and environmental consequences of growth strategies. For
example, sustainable economic growth will consider if the strategy for growth causes any environment
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damage or resource depletion. Significant growth relates to closing the gap between NZ and Australia.
Policy 1: Increasing the saving interest rate will encourage people to save money as it is profitable for them.
People are saving instead of
Price
AS
AS1
spending so there will be a decrease
in consumer spending. This will
Level
cause a decrease in aggregate
demand which will shift the aggregate
demand curve to left. This will cause
a fall in price level (PL-PL1) and real
PL
output (Y-Y1). This will decrease
economic growth. However, increase
PL1
in saving will make an increase in
AD
PL2
investment in firms. When there is an
AD1
increase investment, there will be an
increase in productivity. This will
increase aggregate supply which will
Y1 Y Y2
shift aggregate supply to right. The
Real Output
price level will fall (PL1-PL2) and the
real output will increase (Y1-Y2). As the real output increase caused by shifting aggregate supply is greater
than the decrease in real output caused by shifting aggregate, there will be an increase in real output
overall. As the price level decreased and the real output has increased, there is an increase in economic
growth.
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Policy 2: Decrease the tax on imported raw materials. This will cause an increase in aggregate supply,
which means aggregate supply will shift to the right. This happens because firms are able to produce more
as the cost of production decreased. Cost of production decreased as the tax on imported raw materials
decreased and therefore firms are able to buy same amount of material at lower costs. This makes an
increase in aggregate supply and will cause the price level to decrease and real output to increase. As
there is an increase in real output which means productivity has increased so there is an increase in
economic growth (student included AS/AD model).
Policy 3: Increase subsidy on firms. This means there was an increase in government spending. This will
increase aggregate demand (C+G+I+X-M=AD) which means the aggregate demand curve shifts to the
right. This will cause an increase in price level and real output. As there was an increase in real output
there was an increase in economic growth (student included AS/AD model).
Impact on inflation: Increasing the saving interest rate will make people save money. People are saving
instead of spending so there will be a decrease in consumer spending. This will cause a decrease in
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aggregate demand which will shift aggregate demand curve to left. This will cause a fall in price level.
Increase in saving will make an increase in investment. When there is increased investment, there will be
an increase in productivity. This will increase aggregate supply which will shift aggregate supply to right.
The price level will fall. As the price level decreased there was deflation. Decrease the tax on imported raw
materials. This will cause an increase in aggregate supply which means aggregate supply will shift to right.
This happens because firms are able to produce more because the costs of production have decreased.
This makes an increase in productivity which will increase aggregate supply and will cause the price level to
decrease. As there was decrease in price level, there was deflation. Increase subsidy on firms. This means
there was an increase in government spending. This will increase aggregate demand (C+G+I+X-M=AD)
which means the aggregate demand curve shifts to the right. This will cause an increase in price level. The
price level increased and therefore there was inflation. The shift of aggregate supply to the right was much
greater than shift of aggregate demand to the right so overall the price level decreased which means there
was deflation, (see graph below).
Impact on employment: As the equilibrium has shifted closer to the Y-Full, suggests there was an increase
AS
Price Level
AS1
PL
PL2
PL1
AD
Y
Y1 Y2
AD1
Y-Full
Real Output
in employment. As increasing the saving interest rate, decreasing tax on imported raw materials and
increasing subsidy for firms caused an increase in real output, which means there was an increase in
productivity. As productivity has increased firms may have to employ more people to work because firms
may not be able to produce at their full capacity as there are not enough people and therefore firms employ
more people to produce at full capacity. As more people are employed, the unemployment rate will
decrease and employment rate will increase.
Summary
Policies:
Increasing saving interest rate
Decrease the tax on imported raw materials
Increase subsidy for firms
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These policies showed a significant economic growth as the graph above shows there was a significant
increase in real output which means productivity has increased significantly and the increased subsidy for
firms made an increase in aggregate demand as it is government spending and therefore increased price
level a little bit making sure that the price level was not too low. There was significant real output and the
price level decreased showing us there was deflation but not too much and this shows there was significant
economic growth.