3.3 Macroeconomic objectives

Nominal GDP rises from $800bnto$880bn — a nominal growth rate of 10%. The GDP deflator rises from 100 to 108 — an inflation rate of 8%.

A close approximation of the real GDP growth rate is: Real growth ≈ Nominal growth rate − Inflation rate = 10% − 8% = 2%. More precisely, using the deflator: Real GDP in year 1 = (880 ÷ 108) × 100 ≈ $814.8bn,comparedtothebaseof$800bn, giving real growth ≈ 1.9%.

Real GDP strips out the effect of rising prices so that only the genuine change in the volume of output is captured. The 10% nominal rise partly reflects higher prices (8%), so actual productive output expanded by only about 1.9–2%.

The answer that identifies approximately 1.9% real growth after adjusting for the 8% inflation rate is correct. The other options either ignore the price-level change or misidentify what the GDP deflator measures.

The question asks for the real GDP growth rate, not the nominal rate, so the price level change must be accounted for.

The option stating 10% growth simply calculates the nominal change ($80bn÷$800bn) without deflating for the 8% price rise. This ignores inflation entirely and is therefore incorrect.

The deflator rose by 8% while nominal GDP rose by 10%, so real output did increase — the economy did not contract. This option is incorrect.

8% represents the inflation rate (the rise in the GDP deflator), not the real growth rate. Confusing the price-level change with the output change is a classic error; this option is incorrect.

The remaining option — approximately 1.9% real growth after adjusting for inflation — is consistent with the deflator method and is correct.

$\text{GDP per capita}=\frac{\text{GDP}}{\text{Population}}$. This gives the average output per person, which is the standard approximation for living standards across time.

Year 1: $1,200,000,000,000÷60,000,000=\ast \ast$20,000 per person**. Year 5: $1,500,000,000,000÷80,000,000=\ast \ast$18,750 per person**.

Although total real GDP rose by $300 billion, population grew proportionally faster (by 33%) than output (by 25%). This means the average person's share of output fell, suggesting living standards declined on average.

The option stating that GDP per capita fell from $20,000to$18,750 correctly applies the formula and interprets the result. It is the only option that uses the appropriate per-person measure.

The question tests understanding that total GDP and GDP per capita can move in opposite directions when population growth outpaces output growth.

This option focuses only on the total GDP figure. A rising total GDP does not prove improved average living standards if the population grew even faster — the per-person figure must be checked.

Population growth does not by itself signal better economic performance. It only raises average living standards if output per person also rises. This option is factually incorrect.

The GDP growth rate was 25% and the population growth rate was ~33% — these are not equal, so this claim is also factually wrong and can be eliminated.

Only the option showing GDP per capita fell from $20,000to$18,750 is supported by the arithmetic. It correctly identifies the decline in average living standards despite rising total output.

A national fibre-optic network is a form of infrastructure capital — a physical asset used in production across the whole economy, rather than a consumer good for private enjoyment.

Infrastructure reduces the costs of communication and data transfer for firms across all sectors. Lower unit costs increase firms' ability to supply at every price level, shifting long-run aggregate supply (LRAS) rightward and moving the production possibilities curve (PPC) outward.

Capital accumulation is a supply-side determinant of growth. It expands what the economy is capable of producing (potential GDP), not merely how much spending is flowing through it. This is distinct from a short-run demand-driven rise in output.

The option describing an addition to productive capital that lowers costs and raises the economy's productive capacity correctly identifies the capital accumulation mechanism behind long-run growth.

The question asks for the mechanism by which infrastructure investment drives growth — specifically, which channel is economically accurate.

Infrastructure investment is a supply-side factor that shifts LRAS, not a demand-side stimulus. Describing it as shifting AD through consumer confidence misidentifies the channel.

Government spending on infrastructure does not automatically reduce the budget deficit (it is an expenditure item, not revenue) or directly improve the balance of payments. This is economically incoherent.

Infrastructure investment does not directly raise labour force participation. Connecting it to the unemployment rate and nominal GDP conflates several separate mechanisms and is not the primary growth channel here.

The option correctly identifying capital accumulation → lower costs → higher productive capacity is the precise mechanism through which infrastructure investment contributes to long-run real GDP growth.