Economics – Economic growth and sustainability | e-Consult
Economic growth and sustainability (1 questions)
Login to see all questions.
Click on a question to view the answer
A positive output gap occurs when the actual level of output in an economy exceeds its potential output. During the period leading up to 2008, several factors contributed to a positive output gap in the UK:
- Low Interest Rates: The Bank of England maintained low interest rates for an extended period following the end of the dot-com bubble and the 9/11 attacks. This encouraged borrowing by both consumers and businesses, leading to increased investment and consumption.
- Government Spending: Increased government spending on infrastructure projects, particularly in the run-up to the 2008 financial crisis, boosted aggregate demand.
- Global Demand: Strong global demand for UK exports, particularly from emerging economies, contributed to higher levels of production.
- Productivity Growth: Improvements in productivity allowed businesses to increase output without necessarily increasing employment significantly.
Implications for Macroeconomic Policy: A positive output gap suggests that the economy is operating above its sustainable level. This creates inflationary pressures. The Bank of England would likely respond by raising interest rates to curb demand and reduce inflation. The government might consider reducing government spending or increasing taxes to further dampen aggregate demand. However, these policies could risk contracting the economy back towards its potential output. The optimal policy response is a delicate balancing act.