Economic growth — practice question

Study the source material carefully before you answer Question 1. Source material: Shifts in US macroeconomic performance and policy From 2009 to 2019, US real GDP rose in every year. This happened because of, among other factors, low interest rates, land reclamation and a larger labour force. The higher level of US output brought several benefits, although some workers became unemployed. This occurred because some industries grew while others shut down. Income also was distributed more unevenly and pollution rose. Over this period, US exports and imports both increased. Later in the period, the expansion of trade with China, a major US trading partner, was influenced by rises in US tariffs on some Chinese imports. These rises were expected to affect the US current account balance, output and tax revenue. The US exports a variety of products to China, including ice cream. China is the world’s largest consumer of ice cream, purchasing a third of all ice cream consumed. Chinese consumers sometimes buy chocolate to eat with ice cream. In 2019, the price of chocolate went up. In 2020, US macroeconomic performance altered. The country’s price level increased more slowly, mainly because consumer expenditure fell and workers’ bargaining power weakened. The country’s real GDP decreased and unemployment increased. These changes affected US macroeconomic policy. US government spending rose sharply as shown in Table 1.1. The US central bank, the Federal Reserve, announced in September 2010 that it would permit the inflation rate to rise and would not raise the interest rate. In the past, central banks have tried to keep the inflation rate low because of the effects inflation can have on, for example, investment, exports, the distribution of income and tax revenue. The Federal Reserve said that it wanted to increase economic growth, which can raise income per head, employment and tax revenue.