Economic growth — practice question

The US has achieved faster economic growth than countries in Europe and other regions since the COVID-19 pandemic. In terms of Gross Domestic Product (GDP), growth was especially strong in the fourth quarter of 2023 at 3.3%. This was well above economists' forecast of 2%. As a result, annual growth for 2023 was 2.5%, which was stronger than in other high-income economies. It is expected to do the same in 2024, as shown in Fig. 1.1. Fig. 1.1 International Monetary Fund (IMF) economic growth forecasts for 2023 and 2024. Economists have argued that the US's strong economic growth was driven by both demand-side and supply-side influences. In 2020, the US government reacted to the COVID-19 pandemic by putting US$5 trillion into the economy. Spending in many areas included more generous unemployment benefits and grants to small firms. This very large fiscal boost, far greater than in other countries, has been credited with sustaining consumer spending, which makes up 70% of aggregate demand. On the supply side of the economy, already flexible labour markets allowed firms to make workers redundant. This encouraged firms to invest in new technologies, which raised productivity and supported continued long-run expansion. As firms grew, they took on more workers, which pushed disposable incomes higher. Finally, the US is a net exporter of energy and therefore firms did not face the enormous rise in energy costs experienced by firms in Europe as a result of the conflict in Ukraine. This has helped the US to keep inflationary pressure under control. In March 2024, however, the US inflation rate rose much more quickly than predicted as unemployment fell, causing consumer spending to increase. Although this may bring further economic growth and the benefits that come with it, inflation also involves costs that may have to be addressed. One policy that could be used is to raise interest rates, but US interest rates were already at their highest point for more than two decades because of earlier inflationary pressure. It had been hoped that interest rates would begin to fall, but now there are concerns that cuts in interest rates may be postponed or, even worse, that they may need to be increased further.